Today we are applying a Bear Put spread on OZ Minerals Limited (OZL) which is currently breaking out of a descending triangle and showing bearish entry signals.
Analysis:
OZL is currently trading at $9.475
OZL has currently bounced off a key level of resistance around $9.80, and shows strong bearish entry signal. The stochastic are in the overbought area and look about ready to cross which indicates a change in the short term direction.
We could expect OZL to head lower, all the way down to perhaps its key support level of around 8.75, but it may take its time getting there. We could use a Bear Put spread if we are worried about the timing of this trade and if we want to protect ourselves against the time decay options have built into them.
The Bear Put spread is a bearish trade that can profit from both bearish and sidewards movement. Indeed it can profit from time decay, and therefore just being in the trade can be profitable. This provides a great deal of flexibility when trying to predict the future movement of the short term share price as it allows more room for getting the timing right.
If OZL does drift down, then we can profit from the bearish move, and from the time decay of the strategy.
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.