It seems as if worries about the global economy and the health of the markets are starting to mount. The market moved quite a bit lower last week and it’s anyone’s guess if and when this slide will stop.
Here is a trade idea on a company that might just keep that negative energy flowing.
Monster Beverage Corp. (NASDAQ:MNST — $55.71): Long Puts
The trade: Buy the May 55 puts for $2.50 or less.
The strategy: The long put strategy is generally used for a bearish outlook. The trade profits when the stock falls and the put premium increases to an amount more than was paid as the MNST put option moves farther and farther in-the-money (ITM). Maximum profit is almost unlimited because MNST can only fall to $0 (which is highly unlikely) and the maximum loss is $2.50 or whatever was paid if MNST finishes at or above $55 at May expiration. Breakeven is $52.50 based on a cost of $2.50 at expiration.
The rationale: Monster Beverage Corp. develops, markets and distributes alternative beverages, like energy drinks, globally. The company has moved into the No. 2 spot behind Red Bull as far as market share goes. There has been plenty of talk about the possible dangers and health risks caused by energy drinks and the jury is out on whether or not this controversy will hurt the company in the long run.
Click to EnlargeBut this trade idea is not about investing in MNST. Instead, it’s about seizing a potential opportunity for the stock to pullback. The stock has had quite an extended run — just like the market — but has now run into an area of resistance (prior high) causing a double-top.
When a stock forms a double-top, it has a pretty decent chance to reverse at least in the short-term. If the market remains bearish, MNST has a good shot of dropping to its daily 200 simple moving average at around $54 or even to $52 where its next support is.
When Monster runs out of energy real soon, you could cash in.
As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities.