The market has had a great run in recent months and for those with a lot of bullish exposure, adding bearish option trades can be a good way to hedge some of that exposure.
3M Company was down over 2% Tuesday and closed near the low of the day so could be a nice bearish-trade candidate.
3M stock is still 6 points above the 200-day moving average. If the stock drops back down to that level, bearish option trades will do well.
A bear put spread is a debit spread. That means we need to pay the premium to open the trade.
On 3M, a bear put spread could be set up using the 100 strike as the long put and the 90 strike as the short put for the May 17 expiration.
Max Gain Of $800 By Mid-May
This trade would cost around $200 per contract with a maximum potential gain of $800.
To achieve the maximum profit, 3M would need to drop 12.3% between now and expiration on May 17.
The break-even point for the bear put spread is 98. That's calculated as 100 less the $2 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 stock is trading above 100, the entire spread would expire worthless. The trade would lose 100%, or $200.
Exit Strategy For 3M Stock
For a trade like this, I wouldn't bother with a stop loss. Either it 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. 13 in its industry group. The diversified manufacturing company has a Composite Rating of 62, an EPS Rating of 70 and a Relative Strength Rating of 40.
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
