Wingstop stock was Friday's IBD Stock of the Day and boasts impressive ratings.
According to the IBD Stock Checkup, WING stock is ranked No. 2 in its industry group and has a Composite Rating of 95, an EPS Rating of 98 and a Relative Strength Rating of 97.
Today, we're looking 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.
Trade Works If Stock Rises, Goes Flat Or Even Drops
This type of trade will profit if WING stock trades sideways or higher and even sometimes if it trades slightly lower.
With Wingstop trading around 185, if we use the May 19 expiration, we can sell a 165 put and buy a 160 put for around $1.55.
Selling this spread would generate roughly $155 in premium with a maximum risk of $345.
If the spread expires worthless, that would be a 44.92% return in one month provided WING stock is above 165 at expiration.
Risk Of Losing $345
The maximum loss would occur if Wingstop closes below 160 on May 19. That would see the premium seller lose $345 on the trade.
The break-even point for the trade is 163.45, which is calculated as 165 less the $1.55 option premium per contract.
I would set a stop loss if WING stock drops below 172. Otherwise, another good rule of thumb is to limit the loss to the amount of premium received. In this case, that would be $155.
Sticking to this stop-loss level will help avoid large losses if the trade goes south.
Wingstop is due to report earnings in early May, so this trade would have earnings exposure if held until then.
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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
