The trade: Buy the SodaStream International (SODA) August 55 puts for $3.10 or less.
The strategy: The long put is an option strategy generally used for a bearish outlook. The trade can profit when the stock falls and the put premium increases to an amount more than was paid. Maximum profit is almost unlimited only because SODA can only fall to $0 (which is highly unlikely) and the maximum loss is $3.10 or whatever was paid if SODA finishes at or above $55 at August expiration. Breakeven is $51.90 based on a cost of $3.10 at expiration.
Click to Enlarge The rationale: SodaStream has been competing against competitors like Coca-Cola (KO) and PepsiCo (PEP) since its introduction. In fact there has been talk about one of the major soda companies possibly buying the company eventually, especially if the price is right. It has not happened thus far and the stock has been faltering. Unless it happens in the next week or so, that threat of the company being bought should not affect this trade idea. Over the last several months, more than a few analysts have cut their rating on the stock which could have contributed to the decline.
The stock has been falling since the beginning of July and for this trade to profit, it needs to continue to drop. The stock traded higher on Wednesday and tried to do the same on Thursday before succumbing to selling pressure late in the session setting up a potential sell set-up. A bearish sign for the stock would be if the stock moves below previous lows. If that doesn’t happen, the stock may be looking to reverse. If SODA continues to move lower, the stock has potential to drop to around $50 where the daily 200 simple moving average is residing.
The company is expected to announce earnings on July 30 so exiting the position before the event might be a wise decision considering earnings announcements can be a volatile event for the stock.
No positions held at the time of the writing. If you are interested in a free trial of my LIVE options trading room visit: http://markettaker.com/options_insider_trial/