AppLovin has had an incredible run in the last three months, rising 254%. It's only natural that the stock might pull back to the key moving averages at some point.
Today, I'm looking at a trade that takes advantage of the volatility skew and will also perform well if AppLovin stock experiences a slight pullback.
I'm thinking AppLovin might pull back to 280 in the next few weeks and will look at a bearish calendar at that strike price.
A calendar spread is a trade that involves selling a short-term option and buying a longer-term option with the same strike price.
Traders typically use call options unless the trade has a bearish bias, in which case they would use puts.
Here's the trade I'm looking at:
Traders could sell the Dec. 20, 280 strike put for around $6.80, then buy the Jan. 17, 280 strike put for around $12.40.
That results in a net cost for the trade of $5.60 per spread. That is the most the trade can lose.
Max Profit On AppLovin Trade $1,400
The estimated maximum profit is around $1,400, but that could vary depending on changes in implied volatility.
The idea with the trade is that if AppLovin trades down around 280 in the next few weeks, the calendar spread will increase in value, allowing the trade to be closed for a profit.
The position starts with a delta of -5, meaning the exposure is roughly equivalent to being short 5 shares of AppLovin. But this will change as the trade progresses.
The breakeven prices are estimated at around 245 and 326.
According to the IBD Stock Checkup, AppLovin is ranked No. 1 in its industry group. It has a Composite Rating of 99, an EPS Rating of 83 and a Relative Strength Rating of 99.
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
