Etsy regained its 50-day moving average and is showing improving relative strength.
On Thursday, the stock climbed above the 114.90 buy point of a double-bottom base. If Etsy stock can continue to act positively, a bull put spread option trade could work well.
As a reminder, a bull put spread is a defined risk strategy, so you always know the worst-case scenario in advance.
The trade involves selling an out-of-the-money put and then buying a further out-of-the-money put.
Trade Profits With Move Up, Sideways Or Even Down
This type of trade will profit if Etsy stock trades sideways or higher and even sometimes if it trades slightly lower.
With Etsy trading around 112, if we use the November expiration, we can sell a 90 put and buy an 85 put for around $0.90.
Selling this spread would generate roughly $90 in premium with a maximum risk of $410.
If the spread expires worthless that would be a 21.95% return provided Etsy stock is above 90 at expiration.
The maximum loss would occur if Etsy closes below 85 on Nov. 18, which would see the premium seller lose $410 on the trade.
Break-Even, Stop Loss Levels
The break-even point for the trade is 89.10, which is calculated as 90 less the $0.90 option premium per contract.
The 50-day moving average, currently around 107, could provide a good stop-loss level if the stock starts to head south.
Otherwise, another good rule of thumb is to limit the loss to the amount of premium received. In this case, that would be $90.
Sticking to this stop loss level will help avoid large losses if the trade goes south.
Meanwhile, a broken wing butterfly trade on McDonald's discussed Sept. 27 is up around 6% and could potentially be closed early.
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
