Zim Integrated Shipping Services is sitting at No. 11 in the IBD 50 and is showing impressive relative strength in a tough market.
According to the IBD Stock Checkup, Zim stock has a Composite Rating of 97, an EPS Rating of 80 and a Relative Strength Rating of 98. It is forming a cup-with-handle base.
Investors who think Zim stock will stay above 65 for the next few months, could look at an August bull put spread.
To execute a bull put spread, an investor would sell an out-of-the-money put and then buy a further out-of-the-money put.
Selling the Aug. 19 put with a strike price of 65 and buying the 60 put would create a bull put spread.
This spread was trading on Friday for around $2. That means a trader selling this spread would receive $200 in option premium and would have a maximum risk of $300.
Return Potential Of 67%
That represents a 67% return on risk between now and Aug. 19 if Zim stock remains above 65.
If Zim stock closes below 60 on the expiration date, the trade loses the full $300.
The break-even point for the bull put spread is 63, which is calculated as 65 less the $2 option premium per contract.
This bull put spread trade has a delta of 10. That means it is a similar exposure to owning 10 shares of Zim stock, although this exposure will change over time as the stock price moves.
In terms of a stop loss, if the stock dropped below 62, I would consider closing early for a loss.
With earnings due in mid-August, this trade could have earnings risk if held to expiry.
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
