MercadoLibre is one of the few stocks currently above its 21-day, 50-day and 200-day moving averages.
The stock is highly rated, and traders willing to bet that MercadoLibre stock will stay above 1,700 for the next few weeks could look at 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.
This type of trade will profit if MercadoLibre stock trades sideways or higher and even sometimes if it trades slightly lower.
With the stock closing around 1,810 Tuesday, if we use the Sept. 20 expiration, we can sell a 1,700 put and buy a 1,690 put for around $3. Selling this spread would generate roughly $300 in premium with a maximum risk of $700.
Trade Could Return 43%
If the spread expires worthless, that would be a 42.8% return in 44 days. That's provided the stock is above 1,700 at expiration.
The maximum loss would occur if MercadoLibre stock closes below 1,690 on Sept. 20. That would see the premium seller lose $700 on the trade.
The break-even point for the trade is 1,697. We calculate that as 1,700 less the $3 option premium per contract.
I would set a stop loss if the loss is equal to the amount of premium received. In this case that would be $300. Sticking to this stop loss level will help avoid large losses if the trade goes south.
Exiting Trade Could Be Tricky
Also keep in mind that the bid-ask spread for options on MercadoLibre is quite wide, so it may be difficult getting in and out of this trade.
According to the IBD Stock Checkup, MercadoLibre stock is ranked No. 2 in its industry group. It has a Composite Rating of 98, an EPS Rating of 99 and a Relative Strength Rating of 87.
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
