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As the following graph shows, the price of shares in CGI Group Inc. (GIB.A) has reached an all-time high. We can also see that the RSI (Relative Strength Index) indicator and the stochastic oscillator (%K) are both in oversold territory. In the past, this has been followed by corrections that brought the stock price back down as far as the previous cyclical low. Given this history, it is very possible that the stock price could fall to around $75.

Daily Chart for GIB.A ($78.75, Friday, May 25, 2018)

An investor interested in profiting from this scenario could buy put options expiring on August 17, 2018, choosing the strike that would yield the best return if the price reaches $75.00 on expiration.

We will choose one of the following puts:

  • GIB 180817 P 78 at $1.86
  • GIB 180817 P 80 at $2.78
  • GIB 180817 P 82 at $4.05

 

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Position

                    Option with the best leverage

As the above table shows, of these three put options, it is GIB 180817 P 80 at $2.78 that has the optimal combination of risk and return, offering a potential return of 79.86% if GIB.A reaches the target price of $75.00 on August 17, 2018. Consequently, we will carry out the following transaction:

  • Purchase of 10 put options, GIB 180817 P 80, at $2.78
    • Debit of $2,780

 

Profit and Loss Profile

Target price on the put options, GIB 180817 P 80 = $5.00 ($80.00 – $75.00)

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Potential profit = $2.22 per share, for a total of $2,220

Potential loss = $2.78 per share, or $2,780

 

Intervention

Even though the target price for GIB.A is $75, our potential profit is tied to the $5 target price on the put options. Therefore, as soon as the price of the puts reaches $5, we will liquidate the position, even if GIB.A has not yet reached the target price of $75.

 

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Good luck with your trading, and have a good week!

 

The strategies presented in this blog are for information and training purposes only, and should not be interpreted as recommendations to buy or sell any security. As always, you should ensure that you are comfortable with the proposed scenarios and ready to assume all the risks before implementing an option strategy.

 

The post Selecting the Optimal Put Option appeared first on Option Matters.



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