The Nasdaq’s rally so far this year may have created unsustainable valuations for many technology stocks, raising the possibility of a near-term correction. Here is a bearish contrarian trade using options on an over-extended tech stock. MongoDB (MDB) has seen an astounding move this year. In the 6-month daily chart of MDB shown below, notice that the RSI (relative strength index) surpassed the overbought 70 level and is now falling back below that level. MDB is clearly in a bull run, so although I am considering a bearish trade here, I also need to be aware of the price levels which may act as support for the stock. In the chart below, I have used a popular method called Fibonacci retracements. If the stock does go into a pullback, I have shown 3 important levels where the stock is most likely to bounce back. To increase accuracy, retracement levels work best when they coincide with other areas of confluence. In the case of MDB, the 50% retracement level between $445-$440 also happens to be an area of support. The trade A hotter than expected CPI report this morning has caused the markets to drop significantly. With MDB trading around $476, I am looking to buy an ATM (at-the-money) put spread. For an ATM put spread, I like to wrap the price between my strikes. So my long strike would be above the current price and the short strike would be below the current price. Here is my exact trade setup: Buy $480 put, March. 1st expiration Sell $475 put, March. 1st expiration Cost: $250 Potential Profit: $250 I have chosen March 1 st as the expiration for this trade which is only 17 days away. I have done this because in my experience, bear put spreads work best between 14-21 days. Also, MDB has earnings on March 8 th , so I want to choose an expiration which doesn’t coincide with the earnings event. If MDB trades at or below my short strike by the expiration date, this trade can yield a 100% ROI on the amount risked. With 10 contracts, this equates to risking $2500 to potentially gain $2500 -Nishant Pant Founder: https://tradingextremes.com Author: Mean Reversion Trading Youtube, Twitter: @TheMeanTrader DISCLOSURES: ( Nishant currently has a put spread on MDB.) 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.
