Option Trade: As Growth Stocks Tumble, Consider This Bearish Trade In Shopify

TL;DR

Learn how to initiate a bearish trade in Shopify using a bear put spread strategy.

Transcript

hey option traders today we're looking at setting up a bear put spread in shopify the stock crashed over 10 on tuesday and is now decisively below the 200-day line with growth stocks struggling in the last few months traders might consider initiating a bearish trade in shopify known as a bear put spread an important thing to know about this trade i... Read More

Key Insights

• 💨 The bear put spread strategy can be a low-cost, high-reward way to profit from an anticipated drop in a stock's price.
• ✳️ Traders should consider the risk-reward ratio and adjust the trade's positioning to achieve a more favorable risk to reward scenario.
• 💦 Bare put spreads either work or they don't, so traders should be cautious with position sizing and not rely on stop-loss orders.
• 📅 Earnings risk should be considered when holding the trade until expiration, as Shopify's earnings are scheduled for the end of January.
• 🤑 Virtual account practice and understanding the complexities of options trading are essential before risking real money.
• 💁 Investors should refer to investors.com options for more option trading tips.

Questions & Answers

Q: What is a bear put spread and how does it work?

A bear put spread is a options trading strategy where a trader buys a put option at a higher strike price and sells a put option at a lower strike price. The combination limits potential losses while allowing for potential profit if the underlying stock drops in price.

Q: Why would traders consider initiating a bearish trade in Shopify?

Shopify's stock has experienced a significant drop and is now below the 200-day line. With growth stocks facing struggles, traders might see potential for further downside in Shopify's stock price.

Q: How is the bear put spread set up in Shopify?

The bear put spread in Shopify involves selecting out-of-the-money put options. A long put is chosen at a higher strike price, while a short put is chosen at a lower strike price to create the spread.

Q: What is the maximum potential gain and maximum potential loss in this bear put spread trade?

The bear put spread in Shopify costs around $425 per contract and has a maximum potential gain of $575. However, if the stock is trading above the higher strike price at expiration, the spread would expire worthless and the trader would lose the entire premium paid.

Summary & Key Takeaways

• Shopify's stock crashed over 10% on Tuesday and is now below the 200-day line, making it a potential candidate for a bear put spread.

• A bear put spread is a debit spread strategy where traders pay a premium to open the trade, aiming for a lower-cost, higher reward potential if the stock drops.

• The trade involves selecting out-of-the-money put options and setting up a spread between two strike prices to maximize profit.