Worried About Dips In BlackRock Stock? Try A Bear Put

Put another way, despite the recent run-up in price, Wall Street is bullish on the shares of the asset manager in the long run. However, as part of the short-term sentiment analysis, it would also be important to look at the implied volatility level for BLK stock options, which typically shows traders the market's opinion of potential moves in a security. However, it does not forecast the direction of the move.

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BLK’s current implied volatility is 23.7, which is about 24% higher than the 20-day moving average of 19.1. In other words, implied volatility (IV) is trending higher, which might mean that the option market is expecting increased choppiness.

We expect BLK stock to potentially drop toward $900 or even slightly below. In that case, the $880 level should act as support. Following such a potential decline, BlackRock shares are likely to trade sideways for several weeks, until they establish a base, possibly between $890-$910, and then start a new leg up.

Therefore, BlackRock bulls with a two- to three-year horizon who are not concerned about short-term volatility could consider buying the stock around these levels for long-term portfolios.

Others, who are experienced with options strategies and who believe there could be further declines in BLK shares, might prefer to have a bear put spread.

Most option strategies are not suitable for most retail investors. Therefore, the following discussion should ideally be seen as simply educational, as opposed to an actual strategy to be followed by the average retail investor.

Price: $926.80

In a bear put spread, a trader has a long put with a higher strike price as well as a short put with a lower strike price. Both legs of the trade have the same underlying stock and the same expiration date.

The trader wants BLK stock to decline in price. However, in a bear put spread, both the potential profit and potential loss levels are limited. Such a bear put spread is established for a net cost (or net debit), which represents the maximum loss.

Here’s an example.

For the first leg of this strategy, the trader might buy an at-the-money (ATM) or slightly out-of-the-money (OTM) put option, like the BLK Jan. 21, 2022, 920-strike put option. This option is currently offered at $37.40. It would cost the trader $3,740 to own this call option that expires in slightly less than two months.

For the second leg of this strategy, the trader sells an OTM put, like the BLK Jan. 21, 2022, 900-strike call option. This option’s current premium is $29.50. The option seller would receive $2,950, excluding trading commissions.

In our example, the maximum risk will be equal to the cost of the spread plus commissions. Here, the net cost of the spread is $7.90 ($37.40 – $29.50 = $7.90).

As each option contract represents 100 shares of BLK stock, we’d need to multiply $7.90 by 100, which gives us $790 as the maximum risk.

The trader could easily lose this amount if the position is held to expiry and both legs expire worthless, i.e., if BLK price at expiration is above the strike price of the long put (or $920 in our example).

In a bear put spread, potential profit is limited to the difference between the two strike prices minus the net cost of the spread plus commissions.

So in our example, the difference between the strike prices is $20.00 ($920 – $900 = $20). And as we’ve seen above, the net cost of the spread is $7.90

The maximum profit, therefore, is $12.10 ($20 – $7.90 = $12.10) per share less commissions. When we multiply $12.10 by 100 shares, the maximum profit for this option strategy comes to $1,210.

The trader will realize this maximum profit if BLK price is at or below the strike price of the short put (lower strike) at expiration (or $900 in our example).

Those readers who have traded options before are likely to know that short put positions are typically assigned at expiration if the stock price is below the strike price (i.e., $900 here). However, there is also the possibility of early assignment. Therefore, the position would need monitoring up until expiration.

Finally, we should also calculate the break-even point for this trade. At the break-even price, the trade will not gain or lose any money.

At expiration, the strike price of the long put (i.e., $920 in our example) minus the net premium paid (i.e., $7.90 here) would give us the break-even BLK price.

In our example: $920 – $7.90 = $912.10 (minus commissions)

Bottom Line On BlackRock Shares

We regard BlackRock stock to be a solid long-term choice for most retail portfolios.

However, there could be further profit-taking in the shares, especially if broader markets come under pressure in the short-term. Therefore, a trading strategy as outlined above might be appropriate for some traders with a bearish outlook.

Written By: Investing.com