A short-term buy signal has emerged for ULTA, leading us to consider various trading strategies appropriate for a short-term holding period. With no intention of a long-term investment, we're focusing on options that can effectively capture this short-term bullish momentum. The following table compares three potential approaches, all controlling 100 shares (either directly or through options) and expiring on March 7, 2025: Long Stock, Short Put, and Bull Put Spread.
Note: For these very short-term trades, we've concentrated on higher-probability option strategies. We find that debit-type option trades offer limited advantages beyond leverage in such short timeframes.
Long Stock: This straightforward approach involves buying 100 shares of ULTA at the current price of $376.59. We've set a target profit of $390 and a stop-loss at $353. While this offers the potential for the highest profit ($1,341), it also carries the highest risk, with a potential loss of $2,359 if the stop-loss is triggered. The probability of achieving our target is estimated at 50%.
Short Put (Strike $350): Given our short-term outlook, selling a put option with a strike price of $350 and receiving a premium of $2.90 presents an attractive alternative. This strategy has a higher probability of profit (83%) compared to simply buying the stock, and our maximum profit is the premium received ($290). However, it's important to note that if ULTA falls below $350 by expiration, we are obligated to buy 100 shares at that price. The breakeven point is $347.10. The max loss is unlimited meaning that as the share price drops below breakeven the losses continue to mount. This is similar to owning the stock except our breakeven is lower.
Bull Put Spread (Short $350/Long $345): For a more conservative approach that still benefits from the short-term bullish signal, we're considering a bull put spread. This involves selling a $350 put and buying a $345 put. This strategy has the highest probability of profit (80%) and a capped maximum loss of $424. The maximum profit is the net premium received, $76. The breakeven is $349.24.
Our goal is to balance profit potential with risk management, given our short-term trading objective for ULTA. The Long Stock strategy offers the highest potential reward but also the greatest risk. The Short Put offers a higher probability of profit but comes with the obligation to buy shares if the price falls. The Bull Put Spread provides the highest probability of profit with a defined maximum loss, making it the most conservative of the three options.
Each investor will choose the strategy that best aligns with our risk tolerance and desired probability of success for this short-term trade.
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