Albemarle stock has held up well this year and is currently near a buy point as it forms a double-bottom base.
According to IBD Stock Checkup, Albemarle stock is ranked No. 2 in its group and has a Composite Rating of 97, an EPS Rating of 89 and a Relative Strength Rating of 95.
Albemarle is set to report earnings on Wednesday after the close, so today's trade idea may be too risky for some.
The idea we are looking at today is a bull put spread.
As a reminder, a bull put spread is a defined-risk strategy, so you always know the worst-case scenario in advance.
Trade Works If Stock Rises, Sideways Or Even A Bit Lower
This type of trade will profit if Albemarle stock trades sideways or higher, and even sometimes if it trades slightly lower.
With Albemarle stock trading around 280, if we use the November expiration we can sell a 260 put and buy a 250 put for around $2.60.
Selling this spread would generate roughly $260 in premium with a maximum risk of $740.
If the spread expires worthless that would be a 35% return in less than three weeks. That's provided Albemarle stock is above 260 at expiration.
The maximum loss would occur if Albemarle closes below 250 on Nov. 18, which would see the premium seller lose $740 on the trade.
Albemarle Seen Moving 11.6% On Earnings News
The break-even point for the trade is 257.40. That's calculated as 260 less the $2.60 option premium per contract.
The options market is pricing an expected move of around 11.6% for earnings, so traders would want to be confident the market will respond well to the earnings announcement.
Albemarle stock has moved higher following three of the last six earnings announcements and has stayed within the expected range four out of six times.
Trades such as this held over earnings offer little chance of adjustment if things go wrong.
A bull put spread on Merck discussed Oct. 24 has done well and can be closed. And an earnings iron condor on Apple discussed last week was a winner, but only just.
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, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
