Trade ideas

Today’s trade idea for option traders: Bed Bath and Beyond (trade closed)

(Last Updated On: 9. November 2021)

trade idea for option traders

It’s been a while since I published a new trade idea. The reason for this was that since a couple of weeks the most stocks were rather bearish than bullish. Besides that, the Implied Volatility was too low to get a decent premium. And what should you do in such periods? The answer is simple – do nothing! Stay out of the game and wait, don’t force it. The next opportunity will come for sure which is maybe right now. That’s why I like to publish the next trading idea on options. This time it’s again Bed, Bath and Beyond. I already published a trade on this stock (check it out here). So let’s see if the idea will work out on this stock again.

Disclaimer:
The information I am giving you in this article is for informative purposes only and should not be treated as investment advice. The information presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in trading activities related to the information in this article should do their own research and seek advice from a licensed financial adviser.

Type of a trade: Cash secured put
Alternatively: Bull put spread
Expiration: 15th October (52 days)
Strike: $26
Premium for 1 option: between $205 and $195 on the day this article was published
Margin: apprx. $460 on the day this article was published (Please keep in mind: the margin size depends on your account size. The smaller your account size the higher the margin requirements. The margin I’m publishing here is the margin based on my account size. Therefore, it could also happen that with a small account, you would see a margin of more than $2000)

Pros for this trade:
– Based on the signal I get (ADX-Indicator), the price should continue to move sideways and to stay above the strike so we can get rid of the put option when the time is right
– Apparently improved fundamentals through BBBY’s new management team could support the price of this stock and keep it above the strike
– A relative low Fear & Greed Index of 32

Cons for this trade:
– A pretty low IV Rank (around 13) and IV Percentile (around 11%)
– Currently, BBBY does not pay any dividend so in case you get the stock assigned, you would have to wait (maybe for a longer time) without any benefits until you can offload it with a profit
– As trading with options is also a dealing with probabilities, every of my assumptions could turn out as a wrong estimation so at the end the stock would land in the money and you would close the position with a loss in case you don’t want to keep the stock

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Result of this trade:  Due to the reported diluted loss of $0.48 per share in the Q2/2021, the price of the stock plummeted immediately and thus, landed in the money.
Realized profit for 1 option: between $205 and $195 (full premium as the stock landed in the money)
Days in the trade: 52 (of total 52 days)

Summary: This is again another example to show you that there is no 100% hit rate possible. It’s absolutely normal that trade ideas don’t work out. That’s why it’s also very important to have a strategy and a careful consideration before you enter a trade. Ask yourself questions like: “Do I want to sell options on stocks or rather on futures? What will I do, or what must I do when the plan wouldn’t work out? Can I afford to get a stock assigned or need I to close the position with a bearable loss?”, and so on.

What’s next: Because of the risk of landing in the money, I usually prefer to sell options on dividend payers. In this case, I made an exception and sold an option on a stock of a company with a suspended dividend. The reason for this is that in my opinion, BBBY has good chances to become a profitable turn around. This fact could bring in a nice profit by an increasing stock price. The only thing I have to do is to wait (even without any benefits in the mean time). 
If it wouldn’t work out, I’d lose $2600 but also in this case, this loss would have just a little impact on my account because I did my homework regarding risk management*. In addition, this loss would have a positive effect on the tax burden.

Update on 9th November 2021:
I sold BBBY yesterday with a profit of $200. Yippee-Ki-Yay!
What happened? After I’ve got the 100 shares assigned, I waited several days to let the stock to ground and then I’ve bought another 100 shares. Thus, I could pull the original price down, from the strike which was $26 per share to $20 per share. I did this because in spite of bad fundamental news BBBY suffered, it was just a matter of time the company would come back. Luckily, it happened way sooner I was expecting. With the positive fundamental news about the cooperation with Kroger, the stock soared and caused a short squeeze which pushed the price even higher up to around $25. But it fell too soon so I could sell it just for $21.

Would you like to learn how to trade options in a serious way without false promises and beyond the gambling ambitions of the masses? Then enroll in an online course on Udemy*. Also check my course I created to show you how to profit from crashes in the stock markets with reversal signals*.

 


*Affiliate link: when you click on this link, no additional costs would arise for you and the product or the service will not become more expensive. When you decide to buy the product or use the service, I’ll get a little benefit from the provider which I would reinvest to keep this blog alive.

 

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