Sideways Success: Profit from DJT's Flat Performance

Generally speaking, those early in their investing journey tend to avoid options due to somewhat misguided information related to their speculative nature. Don’t get me wrong — options trading can be super risky, especially if market participants decide to sell (or write to use the proper lexicon) these derivative financial products.

Still, options represent one of the few practical ways to benefit from equities that move in a sideways (directionless) manner. Case in point is Trump Media & Technology Group (DJT). One of the most controversial enterprises due to its association with former President Donald J. Trump, DJT stock initially soared higher, likely on the enthusiasm of the core conservative base.

Unfortunately for believers of the underlying business model — the flagship entity being the Truth Social platform — DJT stock suffered badly due to essentially fading hype. As detailed by CBS News, Trump Media succumbed because of the below headwinds:

• Reduced enthusiasm by meme-stock traders.

• Fading sales and rising losses.

• Expiring lockups that would free major stakeholders in dumping DJT stock.

More than likely, it’s the latter argument that has contributed the most to the fallout. Astute investors realize that Team Trump will want its money. So, DJT stock lost much of its equity value. Still, here’s the thing: it’s possible that most of the bad news has been priced in. If that’s the case, a bull put spread may be an appropriate options strategy.

Win with DJT Stock, Even if It Moves Sideways

With a speculative entity like DJT stock, most retail investors would buy shares in the hopes that they will rise in value. When they do, they can exit, securing a (hopefully) hefty profit. However, in Trump Media’s case, outside of a dead-cat bounce, it’s not out of the question for shares to simply move horizontally.

If one were to buy DJT stock outright, a sideways price action would probably be a net negative; after all, there are administrative costs with buying securities. On the flipside, if you placed a bet that DJT stock will not materially drop in value, you would win in two ways: if the stock went sideways or if it went up. The only way to lose is if the equity moved below the defined breakeven price.

Therefore, if you believe that most of the downside has been baked into the DJT stock price, then you may consider the following trade for puts expiring Sept. 20, 2024:

• Sell the $12.50 put at a bid of 69 cents.

• Buy the $10.00 put at an ask of 30 cents.

Essentially, you will be earning income off the sale of the $12.50 put. Further, the purchase of the $10 put caps the liability of the aforementioned sold put should the trade go against you. Below are the key statistics of this particular bull put spread:

• Maximum profit: 39 cents per contract ($39 in total after multiplying 100 shares)

• Maximum loss: $2.11

• Breakeven price: $12.26

• Risk-reward ratio: 5.41 to 1 (for every $1 of income generated, you put at risk $5.41).

At first glance, making only $39 while putting at risk $211 doesn’t sound that appealing. However, that’s the cost of doing business in a bull put spread. As stated earlier, you have two ways to win: DJT stock moves sideways or up.

In contrast, the opposite side of the trade — the buyer of the $12.50 put — can only win if DJT stock drops below $12.50 or if there is a sudden and large drop in the security so that the time value of the bought put increases. Either way, the put buyer is taking a single directional wager.

Since the odds favor winning in two ways than merely one, the potential reward is limited. And it’s also fair to point out that the downside risk is also limited due to the purchase of the $10 put acting as a liability cap.

Neutrality Can Be Profitable

Ultimately, the lesson here is that you don’t always need to bet on a direction to win. Instead, if a security merely moves sideways, that could be a victory in itself. That’s where selling puts can be intriguing — you’re betting that a stock at best trades along an equilibrium point.

However, selling puts is risky because in theory, a stock could drop to zero. In that case, you would be forced to buy 100 shares of an exercised put option, knowing that you cannot sell those shares because they’re worthless. To limit this risk, you buy a put in a bull put spread to counter this liability, thus setting a defined risk profile.

Finally, put spreads are quite simple as far as multi-leg options strategies are concerned. So, the next time you encounter a consolidating stock, consider selling a bull put spread.