Snowflake is a stock that popped onto my radar Tuesday as it failed at the declining 50-day moving average.
The IBD Stock Checkup shows Snowflake stock is ranked No. 52 in its industry group. It has a Composite Rating of 49, an EPS Rating of 81 and a Relative Strength Rating of 19.
This is the sort of setup I'm looking for when scouting for bearish option trades.
Today, I'll look at a bearish diagonal put spread.
For Snowflake stock, I'll be looking to buy a Sept. 20, 180 put for around $30.50 and sell a June 21, 150 put for around $7.60.
The total cost of the trade is the net premium paid, estimated to be around $22.90 or $2,290 for a standard contract of 100 shares.
Optimal Return When Stock Is At 150
The strategy earns the most profit if Snowflake stock closes right at 150 at June expiry, where the profits are estimated to be around $1,100 per contract.
If the stock drops even further, the trade will still make around $700.
If I'm still bearish on Snowflake stock after the June 21 expiration, I can sell another monthly put or simply hold the long put, the cost of which will have been reduced by the premium received for any sold options.
The net delta on the trade is -26. That mean the exposure is roughly equivalent to being short 26 shares of Snowflake, although this will change as the stock moves and the trade progresses.
Exit Strategy For Snowflake Stock Trade
In terms of risk management, I would set a stop loss of 20%. And if the trade is down roughly $460, I would close it out.
Snowflake is due to report earnings on May 22, so I may close the trade before then.
Adding some bearish trades to your option portfolio can help offset the risk of other bullish trades and neutralize your overall market exposure.
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
