Today we are looking at applying a Bull Put Spread on Woolworths Group Ltd (WOW).
Analysis:
WOW is trading at $35.815.
WOW had a strong day today as investors likely moved to staple stocks due to speculation of future stagflation.
WOW lately has been holding a key support at roughly $34. This is a level that has proven to be a floor not only recently, but also several times in the past. Today’s strong move broke the small flag pattern that had formed the past couple of weeks, which should add further bullish momentum to the stock in the short term.
With uncertainty underpinning global markets, we should expect volatility and whipsawing to continue. Instead of simply buying WOW stock, or entering a directionally driven bullish position, we can instead look at playing this stock defensively. We can achieve this through a Bull Put, where we sell at or below the key level of support of $34.00. Lets have a look:
The max risk on the below position is $12,300, and the max profit is $2,700.
As the matrix above shows, if WOW remains above the sold leg at $34 come expiry day in April, maximum profit is made of $2,700. This means the share price can fall 5% and the position can still make money. By positioning ourselves at $34, we can use the key support that has protected the stock from falling further on several accounts as a last line of defence. If we do indeed see further bullish movement we can always close the position earlier as the matrix shows.
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