Trade Desk has broken out to new highs after a bullish test of the 50-day moving average. The sharp rise off the 10-week line two weeks ago near 118 offered a follow-on buy point. So, as shares have been showing strong accumulation, let's view a bull put spread in Trade Desk stock.
Trade Desk, based in Ventura, Calif., has a three-year annualized earnings growth rate of 33%, according to MarketSurge's weekly chart, and the company posted an outstanding return on equity of 29.4% last year.
Since bouncing off the 50-day moving average in mid-November, the stock has moved from 116 to 139 in a short space of time. Thus, traders thinking Trade Desk will stay above 130 for the next few weeks could look at a bull put spread.
As a reminder, a bull put spread is a defined-risk strategy, so you always know the worst-case scenario in advance. This type of trade will profit if TTD stock trades sideways or higher and even sometimes if it trades slightly lower.
Trade Desk Stock Today: The Setup
With Trade Desk stock trading around 139, if we use the Jan. 17 expiration we can sell a 130 put option and buy a 125 put for around $1.05 per set of contracts, based on recent trading. Selling this spread would generate roughly $105 in premium with a maximum risk of $395.
If the spread expires worthless, that would be a 26.6% return in six weeks, provided Trade Desk stock is above 130 at expiration.
The maximum loss would occur if Trade Desk stock closes below 125 on Jan. 17. In this case, the premium seller would lose $395 on the trade. The break-even point for the trade comes out to 128.95, or 130 minus the $1.05 option premium received per contract.
How To Control Risk
I would set a stop loss if the loss is equal to the amount of premium received, which in this case would be $105. Sticking to this stop-loss level will help avoid large losses if the trade goes south.
According to IBD Stock Checkup, TTD ranks No. 2 in its group and has a Composite Rating of 96, an EPS Rating of 98 and a Relative Strength Rating of 94.
Trade Desk has already reported Q3 results, so this trade should not have any earnings risk. 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
