MercadoLibre is one of the strongest stocks in the market and is on IBD Leaderboard.
According to the IBD Stock Checkup, MercadoLibre stock is ranked No. 1 in its group and has a Composite Rating of 99, an EPS Rating of 74 and a Relative Strength Rating of 93.
MELI was also Friday's Stock of the Day as it hovers in a buy zone.
What I'm thinking in this scenario is an unbalanced iron condor, with a slightly bullish bias.
This can be achieved by using a wider put spread than the call spread.
As a reminder, an iron condor is a combination of a bull put spread and a bear call spread.
First, we take the bull put spread. Using the March 17 expiry, we could sell the 1,050 put and buy the 1,030 put. That spread could be sold on Friday for around $3.25.
Trade Generates $405 In Premium
Then the bear call spread is placed by selling the 1,290 call and buying the 1,300 call. This spread could be sold on Friday for around $0.80.
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Notice that the put spread is 20 points wide and the call spread is only 10 points wide. This gives the trade a slight bullish bias, but also more risk on the downside.
In total, the iron condor will generate around $4.05, or $405 of premium.
The profit zone ranges between 1,045.95 and 1,294.05. This can be calculated by taking the short strikes and adding or subtracting the premium received.
The maximum risk is $1,595 on the put side and $595 on the call side.
Maximum Profit Tops 25%
If we take the premium ($405) divided by the maximum risk ($1,595), this iron condor trade has the potential to return 25.39%.
A stop loss in this case might be calculated based on 25% of capital at risk. That would be a loss of around $400.
One things to note is that MarcadoLibre options have a wide bid-ask spread, so it may be difficult to get filled at a good price. If a good fill price isn't available, it's better to wait for another opportunity.
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 Twitter at @OptiontradinIQ
