The iShares US Real Estate ETF (IYR) dropped below the 50-day moving average in recent days. It looks to be resuming its downtrend. If the exchange traded fund continues to struggle, traders might consider a bearish trade known as a bear put spread.
A bear put spread is a debit spread, meaning that we need to pay the premium in order to open the trade.
Real Estate ETF: The Bearish Trade Explained
On IYR, you can set up a bear put spread by first using the 82 strike as the long put. Then, target the 77 strike as the short put for the Jan. 20 expiration. In other words, you sell this put to help offset some of the cost of the overall trade.
Based on Wednesday-morning action in the ETF, this trade would cost around $75 per contract with a maximum potential gain of $425. To achieve the maximum profit, this trade would need IYR stock to drop roughly 9% between now and expiration on Jan. 20.
The break-even point for the bear put spread: 81.25, calculated by taking 82 less the $0.75 per share option premium per contract. If IYR stock drops early in the trade it may be possible to make a profit at slightly higher prices.
Watch This ETF Price
At expiration, if the real estate ETF is trading above 82, the entire spread would expire worthless. So, the trade would lose 100% or $75 for the 100-share contract.
For a trade like this, I wouldn’t bother with a stop loss. Either the trade works or it doesn’t, so I would trade an appropriate position size in case I suffered the full 100% loss. Alternatively, you could set a stop loss at 50% of the premium paid.
Traders who think this real estate ETF could move higher from here should not enter this trade.
Please remember that options are risky, and investors can lose 100% of their investment.
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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