E EXPE Offers 14.94% Return With 18.46% Margin For Error

Expedia (EXPE) has been on a straight shot higher since late May and is up over 21% in that time.

RSI is currently sitting at 72.93 and is showing signs of negative divergence.

EXPE has had a great run and I feel like it needs to consolidate here, and upside is likely to be limited over the next few months.

I’m also expecting a general market correction some time in mid to late August.

In this scenario, Bear Call Spreads come in to play. The spread I’m looking at is the November $160-$165 spread which was trading around $0.65 on Friday.

That represents a 14.94% return on risk over the next 3 and a half months with an 18.46% margin for error.

The maximum profit on the trade would be $65 per contract with a maximum risk of $435. The spread would achieve the maximum 14.94% profit if EXPE closes below $160 on November 15th in which case the entire spread would expire worthless allowing the premium seller to keep the $65 option premium. 

The maximum loss would occur if EXPE closes above $165 on November 15th which would see the premium seller lose $435 on the trade.  

The breakeven point for the bear call spread is $160.65 which is calculated as $160 plus the $0.65 option premium per contract. Keep in mind that due to the bid-ask spread, you may not be able to get filled at these prices. 

I’m currently trying to get filled at $0.75 to get a little more bang for my buck so will need EXPE to rise a little more in order to get filled.

If I’m filled at $0.75, I’ll hold until expiry unless the spread doubles in value to $1.50 in which case I will either close the trade or adjust by rolling out in time.

It’s now more important than ever to learn how to successfully trade option income strategies. As traders, it’s crucial that we become adept at analyzing the market and finding high probability trade ideas.

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Disclosure: I have no current position in EXPE

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