- Snowflake (SNOW) stock has recently caught attention as it failed at the declining 50-day moving average.
- The IBD Stock Checkup ranks Snowflake stock as No. 52 in its industry group, with a Composite Rating of 49, an EPS Rating of 81 and a Relative Strength Rating of 19.
- Given this setup, a bearish diagonal put spread is being considered for Snowflake stock.
This article discusses the potential for a bearish option trade on Snowflake (SNOW) stock, providing insights into the strategy and risk management involved.
Considering a Bearish Diagonal Put Spread
For Snowflake stock, the plan is to buy a Sept. 20, 180 put for around $30.50 and sell a June 21, 150 put for around $7.60. The total cost of the trade is the net premium paid, estimated to be around $22.90 or $2,290 for a standard contract of 100 shares.
Optimal Return When Stock Is At 150
The strategy earns the most profit if Snowflake stock closes right at 150 at June expiry, where the profits are estimated to be around $1,100 per contract. If the stock drops even further, the trade will still make around $700. If still bearish on Snowflake stock after the June 21 expiration, one can sell another monthly put or simply hold the long put, the cost of which will have been reduced by the premium received for any sold options. The net delta on the trade is -26, meaning the exposure is roughly equivalent to being short 26 shares of Snowflake, although this will change as the stock moves and the trade progresses.
Exit Strategy For Snowflake Stock Trade
In terms of risk management, a stop loss of 20% would be set. If the trade is down roughly $460, it would be closed out. Snowflake is due to report earnings on May 22, so the trade may be closed before then. Adding some bearish trades to your option portfolio can help offset the risk of other bullish trades and neutralize your overall market exposure. Please remember that options are risky, and investors can lose 100% of their investment. This article is for education purposes only and not a trade recommendation.
Conclusion
While Snowflake (SNOW) stock presents an interesting setup for a bearish option trade, it’s crucial to remember the inherent risks involved in options trading. Always conduct thorough due diligence and consult with a financial advisor before making any investment decisions.
