Datadog Stock Slides, But This Option Trade Offers Upside

Datadog (DDOG) was Friday’s Stock Of The Day pick and was part of an IBD list of stocks near buy points for the new year. 

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Datadog stock has traded sideways in the last two months, but in that time has shown impressive accumulation. But on Monday, the stock sold off and slid below the 50-day moving average, though it continues to form a base.

The company is ranked No. 3 in its group and has a Composite Rating of 90, and EPS Rating of 66 and a Relative Strength Rating of 97. 

One mildly bullish option strategy to consider is a bull put spread. This can be a good strategy to implement when a trader has a slightly bullish outlook and implied volatility is higher than normal. 

Datadog Stock Bull Put Spread

To execute a bull put spread, an investor would sell an out-of-the-money put and then buy a further out-of-the-money put. 

Selling the January-expiration, 160-strike put and buying the 155 put would create a bull put spread. 

This spread was trading on Friday, before Monday’s tumble, for around $1.70. That means a trader selling this spread would receive $170 in option premium. The maximum risk would be $330. 

That represents a 51% return on risk between now and Jan. 21 if Datadog stock remains above 160. If Datadog closes below 155 on the expiration date, the trade loses the full $330. 

The break-even point for the bull put spread is 158.30, which is calculated as 175 less the $2 option premium per contract. 

Datadog Trade Risk Similar To Owning 18 Shares

This bull put spread trade has a delta of 9. That means it is a similar exposure to owning nine shares of DDOG stock, although this exposure will change over time as the stock price moves. 

In terms of a stop loss, if the spread increased in price from $1.70 to $3.40, I would consider closing early for a loss. 

With Datadog’s earnings due in early February, this trade would have no earnings risk. 

Please remember that options are risky, and investors can lose 100% of their investment.

This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions. 

Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ

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