A few weeks ago, we looked at a bull put spread trade on Salesforce which worked out well. Today, we're looking at a similar idea on ServiceNow stock.
Because the bull put spread benefits from the passage of time, you don't need the stock to do much to profit.
ServiceNow is back above its 21- and 50-day moving averages and there has been strong support at the 730 price.
Traders that are willing to bet that NOW stock will stay above 710 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.
As with Salesforce, tis type of trade will profit if ServiceNow trades sideways or higher and even sometimes if it trades slightly lower. It doesn't have to do much to profit.
Setting Up The Option Trade In ServiceNow Stock
With NOW stock trading around 775 currently, we can use the April 19 expiration and sell a 715 put while buying a 710 put. The net credit for the trade was around 70 cents this morning.
That credit received of $70 (the premium multiplied by 100 shares) is the maximum profit. The maximum risk takes the difference in strikes minus the premium received, in this case $430.
If the spread expires worthless that would be a 16% return in four weeks provided ServiceNow stock is above 715 at expiration.
The maximum loss would occur if NOW stock closes below 710 on April 19 which would see the premium seller lose $430 on the trade.
The break-even point for the trade is 714.30. which is calculated as 715 less the 70 cent option premium per contract.
Keeping The Loss Small
I would set a stop loss if the loss is equal to the net credit. So if the spread is worth 1.40, you are looking at a stop loss of $70.
Sticking to this stop loss level will help avoid large losses if the trade goes south.
According to IBD Stock Checkup, ServiceNow ranks No. in its group. It has a Composite Rating of 99, an EPS Rating of 99 and a Relative Strength Rating of 90.
Please remember 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
