With the stock market in correction, it can be difficult to come up with bullish option trade ideas, but buyers have been pushing digital turbine (APPS) higher in recent weeks. APPS stock looks reasonably healthy, having recently found support around the 200-day moving average.
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APPS stock is also trading above the 21- and 50-day moving averages and has an IBD composite rating of 94, an earnings per share rating of 67 and a relative strength rating of 87.
The stock is showing an accumulation with an improving relative strength line.
APPS Stock: Bull Put Spread
Traders expecting continued strength in APPS stock might consider a bullish put option trade.
To execute a bullish put spread, an investor would sell an out-of-the-money put option and then buy another out-of-the-money put option.
Selling the 60 November 19 put option and buying the 55 put option would create a bullish put spread.
This spread was trading around $1.00 on Tuesday. This means that a trader selling this spread would receive $100 in option premium and have a maximum risk of $400.
This represents a 25% return on risk by November 19 if APPS stock remains above 60.
If Digital Turbine stock closes below 55 on the expiration date, the trade loses the entire $400.
Break even
The breakeven point for the bullish put spread is 59, which is 60 minus the option premium of $1.00 per contract.
This bullish put spread trade has a delta of 7, which means it is a similar exposure to owning 7 APPS shares, although this exposure will change over time as the price of the action evolves.
In terms of stop loss, if the spread increased from $1.00 to $2.50, I would consider closing early for a loss.
With profits set for early November, this trade could present profit risk, so keep an eye out for that.
Last week we looked at a bull spread over netflix (NFLX), which performed very well and can be closed early for almost full profit.
Remember that options are risky and investors can lose 100% of their investment.
This article is for educational purposes only and not a commercial recommendation. Remember to always do your due diligence and consult your financial adviser before making any investment decision.
Gavin McMaster holds 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.
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