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Today we are applying a Bear Put spread on Treasury Wine Estates Ltd (TWE) which recently bounced off the downtrend line and shows bearish signs.

Analysis:

TWE is currently trading at $14.65

TWE has been trading in a downtrend since its highs in April. The downtrend is characterised by lower peaks and troughs and you can see the strong downtrend line connecting them. This downtrend line will act as a resistance level to help keep pressure on the stock from rising and keep it trading in a downtrend. It is also worth noting that this downtrend has also broken the longer term uptrend line.

Recently TWE came back to the downtrend line, creating a counter trend line and the formation of a pennant pattern. Today we are seeing TWE break the pennant, bouncing off the downtrend line. This indicates TWE is likely to continue the downtrend and therefore continue lower.

We can look to trade a Bear Put, which will provide profit from both a falling share price and side-wards movement. This provides the flexibility to wait for the fall and we have the time to see the share move lower with the downtrend. We can use the downtrend line as a technical stop but if it holds, we can continue to feel confident that the further bearish movement is likely to come.

 

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.