My Favorite Options Trade For This Week

Seasonality suggests that markets will fade ahead through August and September before rising again.

Knowing this, it’s an excellent time to start looking for bearish trades. One company in particular is a very promising target.

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Here’s my favorite options trade for this week.

Labcorp Holdings (NYSE:LH) has come down off its highs for the year and looks set to keep coasting down as the late summer doldrums take hold. Statistically speaking, this stock has performed poorly through August and September. Its relative resistance zone sits right around $265, while support sits near $230. 

That makes it a great target for a long put spread. This type of trade is created by buying a long put and selling a short put further out of the money. The short put will finance the long put. As prices fall, the long put rises quickly in price, and as the short strike is further away, it rises more slowly, creating a profit cushion for the trader. 

Here’s our trade:

• Buy to open (1) 19 Sept $240 put
• Sell to open (1) 19 Sept $230 put

This long put spread currently carries a debit of $3.40. That’s the trade’s total cost and total risk ($340). One can calculate the breakeven price by subtracting the cost of the spread from the strike of $240, so $240 – $3.40 = $236.60.

The max profit equals the difference between the two strikes, less the cost of the spread, so $240 – $230 – $3.40 = $6.30 (less commissions).

The possible ways to leave the trade include:

• Hold the position until around the third week of September. Close the trade in the middle of the week to trade this from a seasonality perspective. 
• Close the trade at a predetermined profit event. This might be 25%, 50%, or more – this is a personal choice. I would prefer to look at price action behavior near $233. 
• Set an alert for the stock price of $255; the breach of this level suggests that closing the trade is required. 
• Alternatively, set an alert for a spread price of $2.00 – the loss of the price of the spread suggests it’s time to close the trade.

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