We are coming off the worst first quarter for the Dow Jones Industrial Average ever.
And investors can’t stop trying to buy the dip.
But I believe shares are in for another plunge lower. And I’ve been positioning my premium services to take advantage of that.
Right now, we are holding just three bullish call options and five bearish put options to benefit from a drop lower. But the way we are positioning new call options is to give the market time.
While I expect stocks to head lower, it’s only in the short term.
So, we only plan to hold bearish puts for a few weeks at a time.
And that’s true for the opportunity I want to share with you today.
The stock we want to buy put options on is a healthcare stock from my home state, North Carolina – Premier Inc. (Nasdaq: PINC).
I see shares ready to drop another 40%. But using put options means you could double your money from the drop.
The stock is trading in a descending triangle. This is a classic pattern.
What I love about this pattern is that it gives us key price levels to watch.
The falling resistance line, in red, is the point we want the stock to stay below. If shares close above it, at $34, then we want to exit our put options.
But, the green support line on the bottom is the key level that I expect shares to push through.
If shares can break below the green line, which sits at $27.50, the stock is set to plunge another 40%.
That gives us an opportunity to buy put options today to prepare for a major move to the downside.
Your Trade Setup
We will use a put option to benefit from the pullback.
As the stock declines, the value of our put option will rise.
Since the expected move is two months, we’ll use the June 19, 2020 expiration date.
The stock is currently trading around $32 a share. We want to use the strike price closest to where the stock is trading. For this trade, that’s going to be the $30 strike price.
That put option costs about $2.50 at last glance. Don’t pay more than $3 for it.
This way, if shares fall to $25, that put option could double our money.
And shares could continue falling, giving us even more upside!
Since this is a bonus opportunity, we won’t be updating you on what action to take next. I recommend setting a limit-order to sell half at whatever would net you a 50% gain.
For example, if you buy the put option for $2.50, you can set a limit-order to sell half at $3.75.
To help limit downside risk, you can either exit if the stock closes above $34, the red resistance line on the chart. Or you can look to preserve capital if your position falls below a 50% loss.
Here’s a table with the trade setup:
This is our third weekly bonus options trade in Winning Investor Daily. We’d love to hear how your trades are going. Just send us an email at firstname.lastname@example.org.
Chad Shoop, CMT
Editor, Quick Hit Profits