This stock’s recent rise might not be justified — strategies for trading during a decline
Editor Thenews24.net
2 min read
The market has made a strong comeback after last week’s concerns about growth, partly due to the Japanese central bank’s rate hike. In this recovery, Domino’s Pizza (DPZ), which had dropped 18% following mixed earnings on July 19th, has seen a slight increase along with other stocks. However, DPZ is facing resistance around the $448 mark, indicating that its recent upward trend might be losing steam. Analyzing the 9-month daily chart shows that the RSI, an important momentum indicator, is declining. This suggests that the upward movement DPZ experienced over the past three weeks could be slowing down, potentially turning into a “dead cat bounce.”
Given this bearish outlook, I’m employing a bear call spread strategy, also known as a call credit spread. This involves selling a $455 call option, just above the resistance level of $445, and buying a $460 call option to limit potential losses and define the trade’s risk. Examining the DPZ options chain shows an 80% probability that the stock will stay below $455 at expiration, making this trade highly likely to succeed. The trade generates a $145 premium, with a potential loss capped at $355. If DPZ remains below $455 by the expiration date, this trade offers a 40% return on investment.
Here’s the specific trade setup:
– Sold $455 call, expiring on Sep 20th
– Bought $460 call, expiring on Sep 20th
– Credit: $145
Credit spread trades like this one generally have a high success rate, with about 70% of trades being profitable. However, the strategy has a downside: while winning trades usually yield modest profits, losing trades can result in significant losses. Therefore, it’s crucial to have a solid risk management plan. By setting predefined levels to cut losses, you can prevent them from becoming too large. With disciplined risk management, credit spreads can provide consistent returns over time.
-Nishant Pant
Founder: https://tradingextremes.com
Author: Mean Reversion Trading using Options and Technical Analysis
YouTube, Twitter: @TheMeanTrader
DISCLOSURES: (Owns a bear put spread in DPZ)
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