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Today we are applying a Bear Put spread on Brambles Limited (BXB) which recently bounced off the downtrend line and shows bearish signs.

Analysis:

BXB is currently trading at $9.70.

BXB has been trading in a broad descending triangle, comprised of a longer term downtrend line coming in at ~$10, and a key level of support at ~$9.

As you can see from the chart below, it recently travelled from its lows back towards the downtrend line, but failed to push through. Since, it has moved down. The Bollinger Bands are starting to open, which is an indication the stock will have strong moves, and in this case, the chart is showing bearish signs.

We would suggest looking at a bear put spread, where you can profit from bearish movement and sidewards movement. Essentially, if it goes nowhere or drifts down, we profit from just being in the trade. It also provides greater flexibility in case the timing was a bit off.

It’s worth noting that ~$10 is also a strong level of resistance that has held a few times in the past. This gives further protection along with the downtrend line to protect the trade against bullish movement.

The strategy:

There are many different types of options strategies used in different market conditions.  But the key reasons why we would trade a Bear Put in this scenario is:

 

  • It benefits from a falling market. Can be used as a short term trade as the stock doesn’t need to move down much to make a profit.
  • Time decay can work in our favour to generate profit form sidewards movement.
  • Is a directional trade that we can get out of quickly, but gives the benefit of being able to wait for the move.