After missing earnings estimates back in February 2024, Boston Beer (SAM) has been stuck in a very bearish downtrend and just hit a fresh 52-week low on Tuesday. We’ll construct an options trade to capitalize on the breakdown. To confirm a bearish bias, I am using 2 technical indicators in the chart below: RSI (Relative Strength Index): RSI attempts to measure the momentum of a stock’s price movement. In SAM’s case, RSI has been dropping sharply since Maty 10, confirming bearish momentum. The DMI helps identify the direction and strength of the trend. It consists of two lines: DI+ (green line) and DI- (red line). When the DI+ is above the DI-, the stock is considered to be in an uptrend. Conversely, when the DI- is above the DI+, the stock is in a downtrend. Currently, we are seeing a DMI crossover, where the DI- has crossed above the DI+. This crossover is significant and indicates that bearish sentiment is picking up steam I will use a trade structure called a “bear put spread.” At the time of writing this, SAM was trading at $260. To construct my bear put spread, I will need to buy a $270 put and sell a $260 put as a single unit with a limit price of $50 (or $500 due to the 100x option multiplier). For this trade to get filled, the stock will need to see a slight uptick in price. Based on my experience, if SAM trades between the $262-$263 area Tuesday, this limit order will get filled. The trade: Bear put spread Most trading platforms will offer a bear put spread (or long put spread) as a trade type and automatically construct the trade for you. All one needs to do is make sure that they pick the right strikes and expiration dates. Here is my exact trade set-up: Buy $270 put, June 21st expiry Sell $260 put, June 21st expiry Cost: $500 Potential Profit: $500 Note that SAM is already trading at $260. If SAM stays at or below $260 by expiration date, this trade will double my money, providing a 100% return on investment (ROI) on the money invested. To maintain a positive expectancy in any trading system, it’s crucial to ensure that your winning trades outweigh your losing ones. If SAM’s stock price starts rising against my directional bias, I would want to cap my losses at 50% of my investment (i.e., $250). By following this rule, every winning trade will offset two losing trades, helping to maintain a positive balance. This approach aims to optimize gains and effectively mi tigate losses. -Nishant Pant Founder: https://tradingextremes.com Author: Mean Reversion Trading Twitter: @TheMeanTrader DISCLOSURES: (None) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
