Today we are applying a Bear Call on Wesfarmers Ltd (WES).
Analysis:
WES is trading at $43.05.
WES has been trading in a downtrend since the highs back in August last year. As with any downtrend, WES recently experience a retracement and formed a short-term pennant pattern. Today has WES breaking the pennant pattern lower, in the direction of the downtrend. There is plenty of room back down to the lows, but with uncertainty underpinning the broader market, it would make sense to be hedge for sideward movement as well.
Instead of simply buying Put Options or mini shorts, we could instead look at a more sophisticated strategy: the Bear Call Spread. Here is one setup:
Max Risk: $4,770.
Max Profit: $1,230.
The payoff matrix below shows the profit and loss at different prices (Y axis) on different days (X axis). The current share price in the matrix is $43.05. If the share price were to fall to the next key support at roughly $40.50 we would profit roughly $1,100 (~23%). The beauty of this strategy is though, that time decay does most of the heavy lifting. Provided the share price remains below the sold leg (pink line above) at $45.01 come expiry on the 21st of July, the trade makes maximum profit. In the payoff matrix below, in a weeks’ time, even if the share price has not shifted, we make a profit. $45.01 is just above both the recent peak, and the accelerated downtrend line. If the share price was to break this level, then it would make sense to probably close the position.
There are other ways to set up these strategies. If you would like help with your trading, or want to learn how to implement these strategies alongside other sophisticated options positions, then consider getting in touch.