Datadog is an IBD Leaderboard stock that is above the 21-, 50- and 200-day moving averages.
Traders who are willing to bet that DDOG stock will stay above 120 for the next week or so 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.
This type of trade will profit if Datadog stock trades sideways or higher and even sometimes if it trades slightly lower.
Risk Vs. Reward Of Option Trade
With Datadog trading around 123, if we use the Jan. 5 expiration, we could sell a 120 put and buy a 115 put for around $0.80 late Tuesday.
Selling this spread would generate roughly $80 in premium, with a maximum risk of $410.
If the spread expires worthless, that would be a 19.5% return in 10 days provided Datadog stock is above 120 at expiration.
The maximum loss would occur if Datadog stock closes below 115 on Jan. 5. That would see the premium seller lose $410 on the trade.
The break-even point for the trade is 119.20. That's calculated as 120 less the $0.80 option premium per contract.
I would set a stop loss if the loss is equal to the amount of premium received which in this case would be $80. Sticking to this stop loss level will help avoid large losses if the trade goes south.
Datadog Stock No. 1 In Its Group
According to the IBD Stock Checkup, DDOG is ranked No. 1 in its industry group and has a Composite Rating of 99, an EPS Rating of 99 and a Relative Strength Rating of 94.
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
