3M stock had a rough day Tuesday, dropping more than 2% and crossing back below the 50-day moving average.
MMM is also showing low implied volatility, which means options are cheap compared with the recent past.
If 3M stock continues to struggle, traders might consider a bearish trade known as a bear put spread.
A bear put spread is a debit spread, meaning that we need to pay the premium to open the trade.
On 3M, a bear put spread could be set up using the 95 strike as the long put and the 90 strike as the short put for the Nov. 17 expiration.
Max Potential Gain Of $370
This trade would cost around $130 per contract with a maximum potential gain of $370.
To achieve the maximum profit, this trade would need 3M stock to drop 11.06% between now and expiration on Nov. 17.
The break-even point for the bear put spread is 93.70. It's calculated as 95 less the $1.30 option premium per contract.
If 3M stock drops early in the trade it may be possible to make a profit at slightly higher prices.
At expiration, if 3M is trading above 95, the entire spread would expire worthless, and the trade would lose 100%, or $130.
How To Control Risk With Trade
For a trade like this, I wouldn't bother with a stop loss. Either the trade works or it doesn't. So I would trade an appropriate position size in case I suffered the full 100% loss. Alternatively, you could set a stop loss at 50% of the premium paid.
Because this is a bearish position, traders who think 3M stock could move higher from here should not enter this trade.
According to the IBD Stock Checkup, 3M stock is ranked No. 17 in its industry group and has a Composite Rating of 34, an EPS Rating of 48 and a Relative Strength Rating of 22.
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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
