Despite better-than-expected results at the beginning of last month, Expedia Group (EXPE) dropped more than 8% right after their earnings conference call on weak forward guidance. However, the stock has erased almost all of its post-earnings losses in a month and is now faced with a critical test. The stock price is stalling near resistance around the $128 price level and I have a bearish options trade to capitalize on it. To further confirm a bearish bias on EXPE, I am using 3 technical indicators in the chart below: RSI (Relative Strength Index): As a stock climbs up, the Relative Strength Index (RSI) gauges the strength of the trend. RSI was moving up sharply between May 30 and June 7 as EXPE was experiencing a fierce rally. However, starting on June 10, RSI has completely flattened out indicating a loss of upward momentum. DMI (Directional Movement Index): When the DI+ (green line) is above DI- (red line), the stock is in an uptrend. However, when the DI lines start changing direction, that indicates a possible change in the current trend. DI+ line has been on a downtrend since 6/12 and also confirms a lack of upward momentum. ADX (Average Directional Index): Another notable sign is the blue line (ADX) which also measures the strength of the current trend and can be used as a divergence indicator. Note that ADX has been dropping consistently since May 30, pointing to a rally which may have lost its legs. The Trade Setup: A Bear Put Spread I am using a “bear put spread” as my trade structure here. A call credit spread can also be used to achieve the same effect. At the time of writing this, EXPE was trading at $124. To construct my bear put spread, I will need to do buy a $124 put and sell a $123 put as a single unit. 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 setup: Bought $124 put, July 5th expiry Sold $123 put, July 5th expiry Cost: $50 The math is very straightforward with these ATM (at-the-money) debit spreads. ATM spreads can usually be bought for half of the width of the strikes. Since the width of our spread is $124 – $123= $1, I can buy the spread for 50 cents (i.e $50 due to 100x option multiplier) If EXPE is trading at $123 or below on the expiration date, this trade will double my money. Alternate trades: Note that $128 is resistance so if EXPE keeps going up for a few more days, it could present better trading opportunities at higher strikes. So, if EXPE goes all the way up to $128 in the next few days, a $129-$128 bear put spread would be an excellent setup as that would coincide with a level of resistance -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.
