Charles Schwab was Tuesday's Stock of the Day from Investor's Business Daily, with strong earnings growth in the last two quarters and a relative strength line at an 11-month high.
If traders were looking to put some money to work, this could be a good potential candidate. Those looking for a more conservative way to play Charles Schwab stock via options could use a bull put spread.
Charles Schwab is up 9.8% for the year compared with a 5.4% loss for the S&P 500. Schwab stock was recently upgraded by both Goldman Sachs and Morgan Stanley. Goldman also set a price target of $100.
As a reminder, a bull put spread is a defined risk strategy. You always know the worst-case scenario in advance. This type of trade will profit if Schwab stock trades sideways or higher. It could also work if it trades slightly lower.
How The Bull Put Spread Would Work
Traders that think Schwab will stay above 77.50 for the next few weeks could sell a June 20 77.50 put and buy a 72.50 put with the same expiration. That creates a bull put spread and traded around 1.10 this morning. Selling this spread generates roughly $110 in premium with a maximum risk of $390.
If the spread expires worthless that would be a 28% return in two months. That assumes Schwab stock is above 77.50 at expiration. Meanwhile, the maximum loss would occur if Schwab stock closes below 72.50 on June 20, which would see the premium seller lose $390 on the trade.
The break-even point for the trade is 76.40, or 77.50 less the 1.10 option premium per contract. That's also 5.9% below yesterday's closing price.
I would set a stop loss if the stock breaks back below 77.50, or of the spread increased in value from 1.10 to 2.20. Sticking to this stop loss level will help avoid large losses if the trade goes south.
Current Ratings For Schwab Stock
According to the IBD Stock Checkup, Schwab stock ranks No. 9 in its group and has a Composite Rating of 90, an Earnings Per Share Rating of 91 and a Relative Strength Rating of 83.
A similar trade from a few weeks ago on Robinhood Markets is looking good so far. Further, it potentially could close early for a nice gain.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, and is conservative in his style. He believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
