Arm Holdings recently joined IBD's IPO Leaders screen and Arm stock saw a massive 8% jump in its stock price Wednesday.
Traders who are willing to bet that Arm stock will stay above 130 for the next few weeks could look at a bull put spread trade.
As a reminder, a bull put spread is a defined-risk strategy, so you always know the worst-case scenario in advance.
This type of trade will profit if Arm stock trades sideways or higher and even sometimes if it trades slightly lower.
With Arm stock trading around 155, if we use the July 19 expiration, we can sell a 130 put and buy a 125 put for around $0.85.
Arm Stock Trade Could Return 20.5%
Selling this spread would generate roughly $85 in premium with a maximum risk of $415.
If the spread expires worthless, that would be a 20.5% return in 36 days — provided Arm stock is above 130 at expiration.
The maximum loss would occur if Arm stock closes below 125 on July 19. That would see the premium seller lose $415 on the trade.
The break-even point for the trade is 129.15. That's calculated as 130 less the $0.85 a share option premium per contract.
Exit Strategy For Arm Holdings Trade
I would set a stop loss if the loss is equal to the amount of premium received. In this case, that would be $85. Sticking to this stop loss level will help avoid large losses if the trade goes south.
According to the IBD Stock Checkup, Arm stock is ranked No. 1 in its industry group. It has a Composite Rating of 99, an EPS Rating of 99 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
