When a company reports some good news, the stock generally moves in a positive direction. Some option traders will then think about how they can possibly take advantage of the move with a bullish strategy.
But maybe, just maybe, they should be thinking about how to take advantage of the move with a bearish strategy instead.
Jazz Pharmaceuticals (NASDAQ:JAZZ) has been trading between about $34 and $40 for the last two months until late last week. Some overall bullishness in the market coupled with a report saying that guidance for the company looks good in 2102 pushed the stock above $40.
Why the bearish strategy, then?
On Friday, the stock gapped up and rose to a level of resistance at the $46 – $47 level. A lot of times, when a stock has gapped up after previous moderately bullish days, the stock will tend to retrace some. To play such a retracement, with JAZZ trading here at $45.39, you can buy the JAZZ Jan 45 Puts for $1.60 or less.
A possible entry can be if JAZZ can trade below and hold the $45 area where it has some support on lower timeframes. This is a speculative play but, if this trade idea is triggered, the stock might be able to drop to $42 in a hurry.
The long put strategy is pretty straightforward. The trade profits when the stock falls and the put premium increases as the JAZZ option moves farther and farther in-the-money (ITM). Maximum profit is almost unlimited only because JAZZ can only fall to $0 (which is highly unlikely) and the maximum loss is $1.60 if JAZZ finishes at or above $45 at January expiration.