Disclaimer: The trades discussed in this blog reflect the author’s personal strategies and decisions. These are not financial advice and should not be considered recommendations to buy, sell, or hold any financial instruments. The author is not a licensed financial advisor. Options trading carries significant risk, and readers should perform their own research or consult a qualified financial advisor before making any investment decisions. Past performance does not guarantee future results.
This trade setup was discovered using our “Sell Out-The-Money Put Spreads (Good Companies, Margin of Safety)” predefined scan. The stock in focus is DexCom (DXCM), currently trading below $80. DexCom is widely known for its glucose monitoring devices, which fit in very well with a growing market of diabetes management solutions. I did my research and found that analysts seem optimistic about the company, with 22 experts offering an average price target of $97.91. This suggests a potential upside from current levels.
Despite this bullish sentiment, I am hesitant to buy the stock outright or invest in short-term call options. To be honest, my caution stems from a lack of deep expertise in DexCom’s business. While I recognize the essential role of continuous glucose monitoring (CGM) technology in the future of healthcare, the competitive landscape is a significant concern for me. There are several companies in the field, and advancements in technology could easily disrupt the market. While DXCM could just as likely outpace its competitors, the opposite may happen as well, which I believe is enough to justify a high-risk approach.
Given these factors, I opted for a bull put spread, a strategy designed to generate income while maintaining a defined and limited risk. Here’s the trade:
So, as you see, here is what I did:
- Sell 1 Put Contract: Strike Price $72, Expiration January 24, 2025
- Buy 1 Put Contract: Strike Price $69, Expiration January 24, 2025
This spread provides a good net credit of approximately. The maximum profit occurs if DXCM remains above $72 at expiration, while the maximum potential loss is capped at $247.5 per contract.
Consider the graph of DXCM:
DXCM has just broken above the Alligator indicator (which I often use to track trends/supports/resistances). And the long-term moving average is standing at $89, so DXCM may try to reach at least that level before moving down.
Why This Strategy Makes Sense to Me
- Margin of Safety: Selling the $72 put ensures a significant margin of safety since the stock is trading near $79 at present. Even if DXCM declines moderately, the trade can still achieve maximum profit.
- Risk Management: The bull put spread inherently limits potential losses to $247.5 per contract, offering a balanced risk-reward ratio for those who are not entirely bullish.
- Income Potential: With a credit of $65, this trade yields a potential return of over 25% on the maximum risk of $247.5, provided DXCM stays above $72 at expiration.
- Time Frame: The expiration date of January 24, 2025, provides ample time for the trade to play out. However, I don’t necessarily aim to hold this position to expiration. My plan is to close it early if I can realize 75% of the potential profit well before then.
Trade Considerations
While DXCM has a strong growth narrative, I believe this conservative strategy aligns better with the current uncertainties surrounding the company’s competitive landscape and technological evolution. The long time frame also gives the stock room to stabilize and benefit from broader market trends.
The bull put spread is particularly appealing for its flexibility. By selling options slightly out of the money, I can collect a premium without requiring DXCM to make significant gains. Additionally, should the stock price approach my short strike price of $72, I have the option to adjust or close the position early to manage risk further.
For transparency, you can find all my trades in the public trade log.
