The market has been on a roller coaster lately, making directional trades a little more difficult than maybe earlier this year. But if you are a trader that uses technicals for some of your trading decisions, not much has changed. A good technical setup can be a potential profitable trade in any market condition.
This just might be one of those setups:
Sina (SINA — $56.37): Put Credit Spread
The trade: Sell the July 50/52.5 Put Credit Spread (selling the July 52.5 put and buying the July 50 put) for 60 cents or better.
The strategy: The maximum potential profit for this trade is 60 cents if SINA is trading above $52.50 at July expiration. The maximum loss is $1.90 (2.50 – 0.60) if SINA is trading below $50 at July expiration. Breakeven is $51.90 at expiration based on a credit of 60 cents.
The rationale: Sina is a Chinese online media company. The company recently posted first-quarter net revenue of $126 million, which corresponds to about a 19% annual growth rate. The Internet advertising outlook might currently look weak in China (which accounts for 75% of Sina’s revenue), but current acquisitions and partnerships should be able to boost revenue in its absence.
Click to Enlarge Looking at SINA’s chart, the stock has traded down to a support area (previous pivot levels) around $56. If support does what it’s supposed to do and keeps the stock from moving lower, this trade idea will be in good shape. The premium will erode away and the spread will decrease in value, which is advantageous to the seller.
If that support doesn’t hold, then the 200-day simple moving average (which can act as support) is hanging out around $54, which still is above the sold put’s strike. If that wasn’t enough support for you, there is a last line of defense. Yet another support area (previous pivot highs and lows) is right around $52.50, which is at the sold put’s strike.
Three lines of defense? Sounds good to me!
As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities.