NextEra Energy (NEE) stock stalled out at its 50-day moving average last week, and on Tuesday the stock broke down through its 200-day moving average. Couple that with a very bearish candlestick and it means NextEra could be a good candidate for a bearish option trade.
So let’s look at a bear call spread that assumes NextEra Energy will struggle to get back above 72.50 between now and mid-October.
A bear call spread involves selling an out-of-the-money call and buying a further out-of-the-money call.
The strategy can be profitable if the stock trades lower, sideways, and even if it trades slightly higher, as long as it stays below the short call at expiry.
Potential Return Of 20.5%
A bear call spread with an Oct. 17 expiration using strike prices of 72.50 to 77.50 can be sold for around 105 cents a share. Traders selling the spread would receive $105 in option premium which is also the maximum possible gain. The maximum loss would be $395.
That represents a potential return of 26.6% between now and Oct. 17.
The spread will achieve the maximum profit if NextEra Energy stock closes below 72.50 on Oct. 17, in which case the entire spread would expire worthless, allowing the trader to keep the $85 option premium.
The maximum loss will occur if NextEra Energy closes above 77.50 on Oct. 17, which would see the premium seller lose $395 on the trade.
While some option trades have the risk of unlimited losses, a bear call spread is a risk-defined strategy. You always know the worst-case scenario in advance. A stop loss could be set if NextEra Energy trades above 72.50, or if the spread value rises from $1.05 to $2.10.
Bear call spreads can be a good way to potentially generate some income while a stock remains in a downtrend. Our last bear call spread on Starbucks (SBUX) is looking good so far.
NextEra Energy Stock Ratings
Investor’s Business Daily gives NextEra Energy stock a Composite Rating of 59 out of a best-possible 99, an Earnings Per Share Rating of 83 and a Relative Strength Rating of 19. According to IBD Stock Checkup, NextEra Energy ranks 16th in its group.
NextEra Energy is a leading U.S. utility holding company with both regulated and nonregulated operations, primarily through subsidiaries like Florida Power & Light and NextEra Energy Resources.
It is a major producer of wind and solar power, aiming to cut carbon emissions by 67% from 2005 levels by the end of this year while expanding its portfolio of contracted clean energy projects.
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, and is conservative in his style. He also believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
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