Dell Inc. (NASDAQ: DELL) lost the 18-day bidding war for 3PAR Inc. (NYSE: PAR) to Hewlett-Packard Company (NYSE: HPQ), and the stock sold off on the news.

The technology sector at large is losing some momentum as the market indexes reach resistance. DELL in particular looks fragile as it bounces off a very important long-term resistance level representing the breakout line of a potential double-top.

A bearish short-term play could be constructed in a number of ways, but based on our price target, a long vertical put spread looks best.

Trade

Enter an October 12/11 long put spread for a debit of 22 cents per spread or better.

Buy to open the DELL Oct 12 Puts
Sell to open the DELL Oct 11 Puts

Target Entry Price

Right now this trade costs approximately 22 cents. If DELL closes below $11 a share at expiration, the maximum gain is 72 cents, which would represent an almost 400% return. We are currently targeting a fall to $11 within the next three to four weeks. 

Position Sizing

The maximum loss is fixed at the net debit. Because this is an out-of-the-money position on a volatile stock, we would not employ a stop loss. Size your position to account for the maximum loss.

To learn more about this trade, watch the video here.

Disclaimer: This article is for educational purposes. It is important to understand the risks of trading options before you attempt a trade like this.

This article is brought to you by LearningMarkets.com.

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