Arista Networks is an IBD 50 Stock that jumped above its 50-day moving average on Wednesday following strong earnings guidance.
Traders who are willing to bet that Arista Networks stock will stay above 280 for the next two weeks or so could look at a bull put spread trade. The stock is up about 24% year to date, after Wednesday's 6.5% rally.
In options trading, a bull put spread is a defined-risk strategy. That means you always know the worst-case scenario in advance.
This type of trade will profit if Arista stock trades sideways or higher and even sometimes if it trades slightly lower.
With the stock trading around 290, if we use the May 24 expiration, we can sell a 280 put and buy a 275 put for around $1.30.
Options Trading: Spread Could Return 35%
Selling this spread would generate roughly $130 in premium with a maximum risk of $370.
If the spread expires worthless, that would be a 35% return in 15 days. That's provided Arista stock is above 280 at expiration.
The maximum loss would occur if the stock closes below 275 on May 24. That would see the premium seller lose $370 on the trade.
The break-even point for the trade is 278.70. That's calculated as 280 less the $1.30 option premium per contract.
Options Trading Exit Strategy
I would set a stop loss if the loss is equal to the amount of premium received. In this, that would be $130.
Sticking to this stop loss level will help avoid large losses if the trade goes south.
According to the IBD Stock Checkup, Arista stock is ranked No. 1 in its industry group. It has a Composite Rating of 99, an EPS Rating of 98 and a Relative Strength Rating of 98.
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 X/Twitter at @OptiontradinIQ
