As the co-author of “The Art of the Deal,” Donald J. Trump knows a thing or two about securing some landmark contracts. Sure enough, retail investors can take a page out of the former president’s book with a simple multi-leg options trade on Trump Media & Technology Group (DJT). Indeed, DJT stock is almost screaming for such a transaction.
Is it a risky move? Absolutely — nothing in the equity ecosystem is absent risk. However, the ebb and flow of market efficiencies (or lack thereof) often shift the probabilities to one side of the spectrum or the other. For instance, converting a first and five (following an opponent’s offsides penalty) in American football is much easier than converting a second and 10.
So it is with options trading. As a trader, you don’t want to take directional wagers all the time; that is, buying calls because you sense the market may move higher or buying puts for the opposite sentiment. Sometimes, the market is giving mixed signals, much like a defensive formation may catch a quarterback off guard.
In that case, would the QB just run the play as initially called by his offensive coordinator? No, great QBs read the game — and if there’s a better play to be run, then it’s up to the team leader to call an audible.
Now, as my good friend and fellow Barchart contributor Will Ashworth recently pointed out, DJT stock is going through a rough patch. Just for the record, in the past month, it lost 35% of equity value. That’s ugly and Ashworth offered the idea of selling (writing) the $10 Oct. 4 put.
I agree with my friend that it’s unlikely that DJT stock will drop below $10. However, I want to offer another solution.
DJT Stock is Begging for a Bull Put Spread
At the time Ashworth discussed DJT stock, the equity represented one of the most unusually active derivatives. On Friday, Trump Media made the unusual options volume list, though the magnitude of aberration was more muted. Nevertheless, that works in the wise investor’s favor.
First, let’s get the core stats out of the way. When the closing bell rang out, total options volume hit 75,058 contracts against an open interest reading of 590,444 contracts. Relative to the trailing-month average, Friday’s stat was up 34.44%. What was interesting, though, was the split: 37,551 calls and 37,507 puts.
On paper, sentiment seems to be evenly divided. However, Barchart’s options flow screener — which filters exclusively for big block transactions likely placed by institutional or professional traders — showed that net trade sentiment sunk to $-560,000, favoring the bears.
In total, the premiums associated with bearish sentiment options landed at $-898,400, whereas the premiums for bullish sentiment options only reached $338,400. Put another way, the big dogs of the market appear to be betting against DJT stock.
So, that’s why I’m not a fan of merely selling Trump Media. While I don’t think shares will drop to $10, you must respect that the heavy hitters are wagering against the enterprise. Instead, I’d prefer a bull put spread, making limited income in exchange for a defined risk profile.
That’s where Barchart Screeners come into play, specifically the tool Bull Put Gems. Here’s what it identified as an attractive opportunity:
- Sell the $12 put expiring Oct. 18 at a bid of $1.66 per contract.
- Buy the $10 put (same expiration) at an ask of $1.15.
By doing this, you are collecting $51 of net income (premium received from the $12 put subtracted by the premium bought for the $10 put) while risking $149 (the cost of the sold put going in the money subtracted by the hedge of the $10 put). Below are the stats to watch:
- Max profit: 51 cents per contract
- Max loss: $1.49 per contract
- Breakeven price: $11.49 per share
- Risk-reward ratio: 2.92 to 1 (for every $1 of income received, you put $2.92 at risk)
Yes, the bull put spread caps the maximum reward to $51. However, the defined downside is $149. While that’s steep, if you sold a put without the protection of a bought put, your risk variable would be far wider.
Implied Volatility is the Key
It’s worth pointing out that on Friday, the options chain for derivatives expiring on Oct. 18 stood at a whopping 182.47%. In contrast, the historical volatility was a much more reasonable (relatively speaking) 66.3%.
Do note that when IV is that high compared to HV, there is an incentive to sell options (whether puts or calls). However, the volatility that the market is projecting could go either way: DJT stock could skyrocket due to a short squeeze or it could continue plunging as the alpha dogs bet against the controversial company.
When IV is that blisteringly high combined with the potential for the underlying security to swing violently in either direction, a multi-leg option trade — such as the bull put spread — is an attractive proposition. Just like in chess, you don’t leave your high-value pieces exposed without protection.
With the put spread, you’re collecting income — but you’re also buying some insurance for your hind end. I dare say that’s a deal “The Donald” would be proud of.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
