Eli Lilly can earn over $1,300 with this option trade at an 8.7% discount.
The S&P 500 is weak, with stock market exposure sitting at 20%-40% on IBD’s advice. One way to reduce your exposure is to add some bearish options to your portfolio.
Eli Lilly (LLY) has been struggling since mid-August and is down 20% over the past three months. It sold on Tuesday with reduced guidance.
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The stock is currently below its 21-50- and 200-day moving averages. Both the 21 and 50-day lines are also trending down.
If Eli Lilly continues to move lower, a bearish spread will be the best way to trade.
A bear spread is a debit spread. That means we have to pay a premium to open the business.
A bearish spread can be set up by Eli Lilly using the 700 hit as the long and the 680 mark for the April 17 close.
Eli Lilly stock trading high profits
This trade costs around $635 per contract, with a maximum profit of $1,365.
To maximize profits, this trade would require Eli Lilly to drop an additional 8.7% between now and the April 17 deadline.
The bearish breakout point is 693.65. That puts the 700 less than the $6.35 option premium per contract.
If Eli Lilly drops early in the trade, it may be possible to make a profit at a slightly higher price.
At expiration, if Eli Lilly’s stock is trading above 700, the entire spread will be worthless. The trade loses 100% or $635.
A stop loss can be set at 50% of the premium paid, which in this case would be a loss of about $320.
As this is a bearish position, traders who think that Eli Lilly may go higher should not enter this trade.
Eli Lilly leads the industrial group
As of 2011 IBD Stock CheckEli Lilly is ranked 1st in the industry group. He has a composite rating of 69, an EPS rating of 94 and a relative strength rating of 41.
Please remember that options are risky and investors can lose 100% of their investment.
This article is for educational purposes only and not for business advice. Always remember to do your own due diligence and consult your financial advisor before making any investment decision.
Gavin McMaster has a Masters in Applied Finance and Investments. He focuses on income trading using options, is very conservative in his style and believes that patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter. @OptiontradinIQ
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