Moderna had a rough day yesterday, dropping over 8%. With MRNA stock trading below its 200-day line for a couple months and crossing back below its 50-day moving average, a bear put spread can profit if the downtrend continues.
Profiting On The Downside
According to the IBD Stock Checkup, MRNA stock is ranked No. 140 in its industry group and has a Composite Rating of 29, an EPS Rating of 10 and a Relative Strength Rating of 25. With ratings that low, it's natural to think of more potential on the short side.
Since MRNA stock options show low implied volatility compared to the last 12 months. With options premiums cheap compared to the recent past, buying premium is more attractive.
So if Moderna continues to struggle, a bearish trade known as a bear put spread is a way to profit.
Setting Up A Bear Put Spread On MRNA Stock
A bear put spread is a debit spread meaning that we need to pay a net premium in order to open the trade.
For Moderna stock, we could buy a put at the 125 strike and sell a put at the 120 strike using a July 21 expiration to set up the spread.
This trade would cost around $135 per contract with a maximum potential gain of $365.
To achieve the maximum profit, this trade needs MRNA stock to drop 15% between now and the July 21 expiration.
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The break-even point for the bear put spread is 123.65. That's calculated by taking the long strike at 125 less the $1.35 option premium per contract.
Managing The Trade
If MRNA stock drops early in the trade it may be possible to make a profit even with Moderna trading above both strikes. The rise in implied volatility while retaining much of the time value would still increase the premium.
But at expiration, if Moderna stock trades above 125, the entire spread expires worthless. That means you lose 100% of the $135 premium paid.
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.
MRNA earnings are in May, so this trade has exposure to earnings if held to expiration.
As this is a bearish position, traders that think MRNA stock could move higher from here should not enter this trade.
As an update for a previous trade, the AMD butterfly spread is at a point where it could be closed early for a nice profit.
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
