After setting a new all-time high of 2,665.19 on Monday, the S&P 500 has started to pull back a bit amid some significant weakness in technology stocks, and the other major indices have followed suit. The S&P lost 10 points on Tuesday, or 0.37%, to close at 2,629, the Dow Jones dropped 109 points, or 0.45%, to end at 24,180, while the Nasdaq fell 13 points, or 0.2%, to finish at 6,762.
Reports on private payrolls, mortgage applications and worker productivity are indicating strength in the underlying economy — but it may not translate to the market overall if the stocks in the technology sector don’t reclaim their position as the market leaders.
In this environment, today I’m recommending a bearish trade on data storage provider Western Digital Corp (NASDAQ: WDC):
Using a spread order, buy to open 1 WDC Jan. 5th $75 put and sell to open 2 WDC Jan. 5th $70 puts for a net debit of about $0.50.
Note: There are several January expirations available for WDC options. Be sure you are opening the weekly options that expire on Friday, Jan. 5, 2018.
A ratio debit spread is simply a way to lower the cost of buying options, as the two option(s) that you sell to open (short) helps offset the cost of the option that you buy to open. Therefore, this ratio put debit spread is a way to lower the cost of establishing a bearish put option trade. Many brokers will require the use of margin and/or a set amount of reserved capital and/or a margin account to execute a debit spread; contact your broker directly for specific requirements.
Because you are short a naked put in this ratio put debit spread, the risk is that you could be obligated to buy 100 shares of WDC at the $70 strike price for every 1 contract that you are short of the WDC Jan. 5th $70 puts. So, you’ll want to exit if WDC gets down to $70.
Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.