The Best Options Trade on Robinhood This Week

Chances are you already know that options can be a great way to make big profits but with lower risk. You may have even given them a try using Robinhood, because it has made options trading easy for individual investors just like you.

Maybe you are sitting on the sidelines as the market makes historic moves each day. You may even ask how you can grab your share but are not quite sure how to do it.

Maybe you're not capturing these 1,000% gains that you see touted on social media by everyday traders like you.

So how can you get started? How do you turn your trading ideas into real profits that you can see pile up in your own trading account?

We can help. Our trading experts offer new ideas daily. In fact, we've got an options trade today that you can do right now, right on Robinhood.

You see, stocks have rallied about 25% since hitting their March 23 low. But that rising tide has swept up some companies that won't trade higher for long.

We're talking about one of the weakest sectors in the market today: retail.

Retail sales just had their biggest monthly decline ever in March, but some retail stocks have soared despite store closures, plummeting sales, and little consumer confidence. One of those things has to give, and we don't see sales surging anytime soon.

Just take a look at some of these performances:

  • Gap Inc. (NYSE: GPS) up 51.5% from its April 2 low.
  • Kohl's Corp. (NYSE: KSS) up 63.3% from its April 3 low.
  • Macy's Inc. (NYSE: M) up 39.1% from its April 1 low.

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This won't last. And that's why we are looking at retail stocks with a bearish eye as the broad market looks ready for another dip lower.

D.R. Barton, Jr., Money Morning's Technical Trading Specialist, sees one mall-based retailer particularly ripe for further losses. This sort of "Reality Gap" - where Wall Street is pushing one idea, but the reality is in another direction - is something D.R. loves to exploit with options trades.

It jumped over 60% after hitting its April 3 low. But it's bouncing off a key resistance level right now. That means it's heading lower as traders lose faith in its rally. And there's no good news on the horizon that could save this stock either.

We're going to capture that downside with an options trade. It's not as basic as a put option either; it's a trade that will maximize your upside while limiting your cost.

And it's an options trade you can easily execute on Robinhood...

Our Robinhood Options Trade of the Week

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Nordstrom Inc. (NYSE: JWN) suffers from all the problems we've seen hit the retail sector over the past few years, from online competition to the general reduction in mall traffic. And now with everyone being encouraged - or required - to stay home for "social distancing," and stores closing their doors for who knows how many weeks, that could be all she wrote for many retailers.

The recent bounce in Nordstrom stock has largely been fueled by short covering with over a third of the stock's float (outstanding share less the restricted shares) sold short at its lows. That fuel may already be used up.

As you can see in the chart below, JWN just hit a key resistance level, which means its upside just maxed out.

And Nordstrom's debt rating is just two steps above junk, which could be reduced at any time. That means now is the time to take advantage of the small bounce in the stock price and create a bearish trade on the stock using options.

Because market volatility is still so high, all options prices are quite expensive. But there is a way we can still play this in a cost-effective way.

The trade we have in mind is called a bearish put spread, and it is much simpler than it sounds. The idea is to buy a put option that will profit when the price of Nordstrom stock goes lower but also sell a different put that will bring in cash to partially offset the price of the put we buy.

Here is how it works:

Nordstrom stock closed Tuesday at $20.05 per share. If we buy a put with a strike price very close to the stock price - called "at the money" - we will make money if the stock price falls. But as we said, the price of the option could be high.

So, we then sell a put option on Nordstrom stock with a strike price below the price of the stock. The sum cost of the trade will be less than just buying a single put, and we will still make money when the price of the stock falls.

The caveat is that we will cap the potential gains. There is no free lunch.

Here is D.R. Barton's recommended trade. Remember, you buy and sell simultaneously to create a spread trade.

First, this is how you'll enter the trade:

  • Buy to open the JWN May 15, 2020 $20 strike put (KSS200515P00017500).
  • Sell to open the JWN May 15, 2020 $17.50 strike put (KSS200515C00015000) for a net cost (debit) of $0.85 or less on a limit order, good until canceled.

Once the trade's in action, here's how you'll cash in:

If everything goes according to plan, you'll book a profit of 60% or more before May 7, 2020, at 3 p.m., whichever comes first.

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