Buying puts on downtrending stocks

Setups81 · Aug 28, 2024

It seems there is a plethora of poorly run, debt-saddled companies headed for bankruptcy. This has always been the case but it seems there are more of them now, particularly in the tech sector.

There are quite a few currently trading in the $5-15 range that have been below their 200sma for weeks or months, and happen to offer weekly options.

Entry would be as it's breaking down after a few days of sideways consolidation, could peel as it goes your way or hold until close to expiry (a few weeks generally). Stop out only if it breaks old consolidation highs to the upside. Would only be ITM options with deltas near 1 so you aren't bleeding theta decay. Position sizes are no more than 2% of account so you can withstand waking up to a surprise gap up.

I've had success with it, but the sample size is far too small to draw any conclusions. Was just wondering if anyone else is doing this, either exclusively or as part of a larger strategy.

nitrene · Aug 31, 2024

Is this a short term strategy or do buy LEAPs on them? I've made money buying OTM puts on LULU, ULTA, NKE, SBUX, etc. Former high flyers where the macro changed. I guess that's different than your strategy. I think shorting companies that still heavily on China revenue should be a winner as well.

I think the next group to drop due to the macro is the Travel stocks and maybe even the fast food and food distributors like CALM.

Setups81 · Aug 31, 2024

What I do is shorter term than that, but yes I think LEAPs would work too. I’m not skilled enough to read the macro signals. I just follow the trend/momentum. For example, WBA broke down below that 10.60 area on Aug 12, and the Sep 6 11.5 puts have doubled since then. Seemed like one of those nice, obvious, don’t-overthink-it setups. Obviously WBA is having a lot of problems and may not survive much longer, but I really only look at that fundamental as a bonus to what I’m seeing in the daily chart.

Riding the downtrends on these embattled companies seems smoother/more consistent than riding the uptrends in companies doing well. Have you noticed this as well?

I know a lot of these traders who hit it big say they compounded small accounts by shorting penny stocks. This is basically a cousin of that, except you don’t need a margin account (and the associated risks of owing more than what’s in your account) to execute it.