Strategy Stock Falling Can Produce Profit Using This Trade

Strategy (MSTR) stock closed near its low of the day on Tuesday and is below the 21-day, 50-day, and 200-day moving averages. Strategy has also seen a declining relative strength line since mid-July.

Taking a look at a bear call spread assumes Strategy, a high-profile bitcoin investor and business software maker, will struggle to get back above 350 between now and mid-November.

A bear call spread involves selling an out-of-the-money call and buying a further out-of-the-money call.

The options strategy can be profitable if the stock trades lower, sideways, and even if it trades slightly higher, as long as it stays below the short call at expiry.

In the options market, a Nov. 21 expiry bear call spread on Strategy stock using the 350-355 strike prices can be sold for around $1.

Maximum Profit, Maximum Loss

Traders selling the spread would receive $100 in option premium, which is also the maximum possible gain. The maximum loss would be $400. That represents a potential return of 25% between now and Nov. 21.

The spread will achieve the maximum profit if Strategy stock closes below 350 on Nov. 21, in which case the entire spread would expire worthless, allowing the trader to keep the $100 option premium. Basically, that means you want Strategy stock to remain below its 200-day line.

Meanwhile, the maximum loss will occur if Strategy closes above 355 on Nov. 21, which would see the premium seller lose $400 on the trade.

While some option trades have the risk of unlimited losses, a bear call spread is a risk-defined strategy, and you always know the worst-case scenario in advance.

The break-even price is 351 at expiration. In terms of managing the trade before expiration, a stop-loss could be set if Strategy trades above 330, or if the spread value rises from $1 to $2.

Strategy Ratings At IBD

Bear call spreads can be a good way to potentially generate some income while a stock remains in a downtrend.

Investor’s Business Daily gives Strategy stock a Composite Rating of 20 out of a best-possible 99, an Earnings Per Share Rating of 32 and a Relative Strength Rating of 21. According to IBD Stock Checkup, Strategy ranks 53rd in its group. 

Strategy is due to report earnings in late October, so this trade would have earnings risk if held to expiration.

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 due diligence and consult your financial adviser before making any investment decisions.

Gavin McMaster has a masters in applied finance and investment. He specializes in income trading using options, and is conservative in his style. He also believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.

YOU MIGHT ALSO LIKE:

Snowflake Stock: Try This Iron Condor Trade With A Bullish Tilt

Taking Advantage Of Hims & Hers Stock Volatility

Netflix Earnings Are Coming. This Trade On The Stock Has A Large Profit Zone.

This Robinhood Trade Stands To Pay Off With A Nearly 40% Investment Return