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They say stocks take an escalator up and an elevator down. In other words, they tend to move quickly when they fall.
You've certainly seen the truth in that old saying this week as stock have taken a plunge.
But if you do your homework, you can be calm and collected while you position for the rebound. What you don't want to do is try to time the end of the current pullback. That's hard for even the pros.
Instead, we've got two options trades – a call and a put trade – for you that can help you take advantage of the current downturn without taking on too much risk.
After all, one bad day (or even several) in a market that has shown such resilience and pundit-defying strength is not going to derail it.
Take consumer stocks, for example. You might think that a lockdown and social distancing would keep a lid on their profits. In some cases, that would be correct, such as in industries where people gather indoors: restaurants, theaters, concerts.
But the U.S. economy came roaring back after its early difficulties. The American people figured out ways to stay afloat, and that is why the rally from March has been so powerful.
And even for people who are still staying close to home, there is plenty of spending happening on things like work-at-home supplies and food. Home improvement is also huge. And there is even plenty of not-so-important spending going on, as Amazon.com Inc.'s (AMZN) meteoric rise can attest.
That's why Money Morning's options trading specialist, Tom Gentile, thinks there is opportunity in the consumer discretionary sector.
Take Under Armour Inc. (NYSE: UAA), for example. The athletic clothing maker fared particularly poorly as the market collapsed in February and June. As professional sports shut down earlier in the year, the company lost a good chunk of revenue. But now that pro sports is making a comeback with baseball, basketball, and hockey all crowning their champions over the past few weeks, people are starting to buy again.
One look at the chart and you can see how the stock went nowhere from March through September. But in that last month, money started to flow into it, and the price broke out to the upside from its range. Shares are up over 35% since the end of August. Considering the appeal of health-related products, including sports, there is a lot of upside potential as the stock plays catch-up.
No doubt, the recent market decline was scary, and with the uncertainty over the election and another round of stimulus, there may be a little more of a rough patch to get through. That's why we've got two bullish options plays that can also limit your risk.
We're keying in on a way to trade this sector with our best call and put options to trade right now…
The Best Call Option to Trade Now
Buying a call option on Under Armour is a simple strategy, but it leaves you vulnerable to further market weakness. However, if you use a strategy call a "bullish call spread," you can trim your risk by cutting your up-front cost and limiting your potential downside loss.
A call spread involves buying a call option with a strike price just below the current price of the stock and then simultaneously selling a call options with the same expiration date but with a strike price above the current stock price.
With Under Armour stock trading at about $13.20, you could buy the Jan. 15, 2021 Under Armour $12.50 call and sell the $15 call. The money you earn by selling the higher-strike call will partially offset the cost of the lower-strike call you buy. Your net cost will be lower, and so will your risk.
Of course, there is no free lunch, so in exchange for lower risk, your upside potential is capped. But if UAA continues to break higher, then you can net a solid payday.
But that's not the only options strategy to use here…