A few weeks ago, we looked at a bull put spread trade on Datadog. With Datadog stock still looking strong, today would be a good day to reload on that trade.
Traders 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.
With DDOG trading around 126, let's focus on options that expire Feb. 16. We could sell a 120-strike put option and then buy a 115 put for a net credit of around $1.60 per set of contracts, based on recent prices. So, selling this spread would generate roughly $160 in premium.
The trader bears a maximum risk of $340.
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If the spread expires worthless that would return 47% in one month — provided DDOG stock closes above 120 at expiration.
The maximum loss would occur if Datadog stock closes below 115 on Feb. 16. In this scenario, the premium seller loses $340 on the trade.
The break-even point for the trade stands at 118.40. Calculate this simply by taking 120 less the $1.60 option premium per contract.
Where To Cut Losses
I would set a stop loss if the loss in Datadog stock is equal to the amount of premium received — in this case that would be $160.
Sticking to this stop loss level will help avoid large losses if the trade goes south.
According to IBD Stock Checkup, Datadog stock is ranked No. 1 in its group. It holds a Composite Rating of 99, an EPS Rating of 99 and a Relative Strength Rating of 96.
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
