Moderna hit resistance and failed to close above a declining 50-day moving average Tuesday.
Traders who think Moderna stock will not reclaim the 50-day line any time soon could look at a bear call spread option trade.
A bear call spread involves selling an out-of-the-money call and buying a further out-of-the-money call.
The strategy can be profitable if the stock trades lower, sideways, and even if it trades slightly higher, as long as it stays below the short call at expiry.
Trade Offers $155 In Premium
Tuesday, a Moderna bear call spread using the November expiry and the 145-150 strike prices was trading around $1.55 per share.
Traders selling the spread would receive $155 in option premium, which is also the maximum possible gain. The maximum loss would be $345.
The spread will achieve the maximum profit if Moderna stock closes below 145 on Nov. 18. In that case the entire spread would expire worthless, allowing the trader to keep the $155 option premium.
The maximum loss will occur if MRNA stock closes above 150 on Nov. 18, which would see the premium seller lose $345 on the trade.
While some option trades have the risk of unlimited losses, a bear call spread is a risk-defined strategy, and you always know the worst-case scenario in advance.
A stop loss could be set if Moderna trades above 145, or if the spread value rises from $1.55 to $3.10.
Bullish On Moderna? Then Take A Pass
Because this is a bearish position, traders who think Moderna stock could move higher from here should not enter this trade. The position starts with a delta of -6, meaning it is roughly equivalent to being short six shares of MRNA.
According to the IBD Stock Checkup, Moderna stock is ranked No. 127 in its industry group and has a Composite Rating of 48, an EPS Rating of 46 and a Relative Strength Rating of 23. Those are weak numbers.
Moderna is set to report earnings in early November, so this trade would have earnings risk if held to expiration.
A covered call trade on Clearfield discussed Oct. 3 looks like it will be bang on the money and is showing profits of $600.
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
