Intel stock today is flat after dropping like a stone in a stock market that is trading under severe pressure. If the stock continues to struggle, traders might consider a bearish trade known as a bear put spread.
A bear put spread works as a debit spread. This means that we need to pay the premium in order to open the trade.
How To Set Up This Trade In Intel Stock
Traders can set up a bear put spread on INTC by using the 30 strike as the long put and the 25 strike as the short put for the Dec. 16 expiration.
This trade would cost around $185 per contract with a maximum potential gain of $315. Placing the trade further out-of-the-money would create an even more favorable risk to reward scenario. To achieve the maximum profit, this trade needs to see Intel stock drop 14.65% between now and expiration on Dec. 16.
The break-even point for the bear put spread? Calculate by taking 30 less the $1.85 option premium per contract, or 28.15.
So, if Intel stock drops early in the trade it may be possible to make a profit at slightly higher prices. At expiration, if the megacap tech is trading above 30, the entire spread would expire worthless. The trade would lose 100% or $185.
Use A Stop? Or Not?
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.
As this is a bearish position, traders who think Intel stock could move higher from here should not enter this trade.
INTC ranks No. 22 in its group, according to Stock Checkup. Intel stock also shows a lowly Composite Rating of 12, and EPS Rating of 43 and a Relative Strength Rating of 10.
Earnings are set for late October, so this trade would have earnings risk if held to expiry.
Please remember that options are risky, and investors can lose 100% of their investment.
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
