After failing to meet earnings estimates in February 2024, Boston Beer (SAM) has been on a continuous decline, reaching a new 52-week low recently. To confirm the bearish trend, two technical indicators are used: RSI (Relative Strength Index) and DMI (Directional Movement Index). RSI measures the momentum of a stock’s price movement, and in the case of SAM, it has been decreasing significantly since May 10th, indicating bearish momentum. The DMI helps determine the direction and strength of the trend, with the current crossover showing that bearish sentiment is strengthening.
To take advantage of the bearish trend in Boston Beer, a trade structure known as a “bear put spread” is being utilized. With SAM trading at $260, the strategy involves buying a $270 put and selling a $260 put as a single unit with a limit price of $50 ($500 due to the 100x option multiplier). The intention is for the stock to experience a slight uptick in price for the trade to be filled successfully. If SAM trades between the $262-$263 range, it is expected that the limit order will be executed.
The trade set-up consists of buying a $270 put and selling a $260 put, both expiring on June 21st. The cost of the trade is $500, with a potential profit of $500 if SAM remains at or below $260 by the expiration date. This scenario would result in a 100% return on investment (ROI). However, in the event that SAM’s stock price starts to rise against the anticipated trend, it is crucial to implement risk management strategies to limit losses. Capping losses at 50% of the initial investment ($250) ensures that winning trades offset potential losses and maintains a positive balance.
In any trading system, maintaining a positive expectancy requires a balance between winning and losing trades. By following a rule to cap losses at a certain percentage of the investment, the goal is to optimize gains and effectively mitigate potential losses. This approach aims to ensure that every winning trade has the ability to offset two losing trades, ultimately working towards a profitable trading strategy.
The bearish downtrend in Boston Beer presents an opportunity for traders to capitalize on the stock’s decline through a bear put spread trade. By utilizing technical indicators to confirm the trend, setting up a strategic trade, and implementing risk management techniques, traders can work towards optimizing gains and minimizing losses in their trading endeavors. It is essential to approach trading with a disciplined and well-thought-out strategy to navigate the volatile nature of the market effectively.