Trade Desk (TTD) has been pummeled recently but managed to close 1% higher yesterday and buck the downward market trend. A 70 price level could prove to be strong support, and with the stock deeply oversold, further downside may be limited. Traders looking for a more conservative way to play Trade Desk stock using options could use a bull put spread.

Bull Put Spread Strategy For Trade Desk Stock

As a reminder, a bull put spread is a defined-risk strategy. You always know the worst-case scenario in advance. It starts by selling a put to bring in a credit from the option premium. Then you simultaneously buy a put at a lower strike price.

Take Trade Desk. Since it found support at 60 over a year ago and hasn't touched it since, we can use that as the strike for the short put with an expiration of May 16. It was trading around 2.15 this morning. As long as Trade Desk stays above this level for the next few months, the trade will work out.

What if it doesn't? We'll buy a put at 55 that will prevent losses from mounting. The 55 put traded around 1.25 this morning. So we'll sacrifice some of our credit but still come out with a net credit of 90 cents for the bull put spread.

Calculating Profit And Loss

Why give up the money? Downside protection. No matter how wrong you are or how low Trade Desk might go, the losses are capped.

The end result is that you can achieve the maximum profit if Trade Desk trades sideways or higher, and in this case even if it trades a good deal lower. With the stock trading above 73 this morning, it could lose an additional 18% and the bull put spread will still get the full profit at expiration.

Selling this spread generates roughly $90 in premium. That's also the maximum profit if Trade Desk stays above 60 at expiration. But what about the defined risk?

If you take the width of the spread at 5 points and subtract the premium received, that leaves you with a maximum risk of $410.

If the spread expires worthless, that would be a 22% return in just under three months. All Trade Desk has to do is stay above 60 at expiration.

Stop Loss And Break-Even Levels

The break-even point for the trade is 59.10, which is calculated as the short put strike of 60 less the 90-cent option premium per contract. That's a lot of room that keeps the trade successful. That's one of the reason why there is less premium for the trade. It has a high probability of success.

I would set a stop loss if the loss is equal to the amount of premium received, which in this case would be $90.

Sticking to this stop-loss level will help avoid large losses if the trade goes south.

According to IBD Stock Checkup, TTD stock ranks No. 9 in its group and has a Composite Rating of 51, a stellar EPS Rating of 98 and a dismal Relative Strength Rating of 11. Not the typical ratings for a bullish trade, but in this case we are really betting on the stock not going down significantly further.

Please remember that options are risky and investors can lose 100% of their investment. 

This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.

Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ

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