Generac Holdings (GNRC) recently saw its stock jump 14% following a strong earnings report, fueled by a surge in demand for power backup equipment due to extreme weather events. This spike triggered a wave of options trading, with activity rising to 2.3 times the average daily volume. Despite this uptick, there’s a belief that GNRC’s stock might see a decline over the next month, given its overall downward trend this year.
This scenario opens the door for a tailored options strategy aimed at investors anticipating a dip in GNRC’s price. The notable activity around the January 2025 100-strike put and the weekly 11/3 92-strike put highlights the opportunities within the options market.
In the following discussion, we introduce a few strategies aimed at capitalizing on the anticipated price movement. This simplified guide aims to help everyday investors navigate the post-earnings scenario, outlining steps to potentially profit from a downward price trajectory.
- Long Put:
- Buy a put option with a strike price slightly above the current market price of GNRC. This strategy profits from a decrease in the stock price. Choose an expiration date that gives the stock enough time to move in the anticipated direction.
- Risk (scale of 1-5, 1 being the lowest): 3 (Your maximum loss is limited to the premium paid.)
- Reward (scale of 1-5, 1 being the lowest): 4 (Potential for significant gains if the stock price drops substantially.)
- Buy a put option with a strike price slightly above the current market price of GNRC. This strategy profits from a decrease in the stock price. Choose an expiration date that gives the stock enough time to move in the anticipated direction.
- Put Spread (Bear Put Spread):
- Purchase a put option with a strike price slightly above the current price of GNRC, and sell another put with a lower strike price. Both options should have the same expiration date. This strategy allows you to profit from a decline in the stock price while minimizing the cost of purchasing the puts.
- Risk: 2 (Losses are limited, but the cost of the strategy is reduced by the premium received from the sold put.)
- Reward: 3 (Moderate profit potential, which is capped at the difference between the strike prices minus the net premium.)
- Purchase a put option with a strike price slightly above the current price of GNRC, and sell another put with a lower strike price. Both options should have the same expiration date. This strategy allows you to profit from a decline in the stock price while minimizing the cost of purchasing the puts.
- Bear Call Spread:
- Sell a call option with a strike price near the current market price of GNRC, and buy another call with a higher strike price, both with the same expiration date. This strategy profits if the stock price stays below the strike price of the sold call.
- Risk: 3 (Losses are limited to the difference between the strike prices minus the net premium received.)
- Reward: 2 (Profit potential is capped at the net premium received.)
- Sell a call option with a strike price near the current market price of GNRC, and buy another call with a higher strike price, both with the same expiration date. This strategy profits if the stock price stays below the strike price of the sold call.
- Iron Condor (if you think the stock will remain range-bound after a slight decline):
- This strategy involves selling an out-of-the-money call and an out-of-the-money put, while simultaneously buying a further out-of-the-money call and a further out-of-the-money put. It’s a neutral strategy that profits when the stock price remains within a certain range.
- Risk: 2 (Losses are limited to the difference between the strike prices of the legs minus the net premium received.)
- Reward: 2 (Profit potential is capped at the net premium received.)
- This strategy involves selling an out-of-the-money call and an out-of-the-money put, while simultaneously buying a further out-of-the-money call and a further out-of-the-money put. It’s a neutral strategy that profits when the stock price remains within a certain range.
- Covered Put (if you can short the stock):
- Short the stock and sell a put option. This strategy profits from a decline in the stock price.
- Risk: 4 (Potential for unlimited losses if the stock price rises, but risk can be somewhat managed by the premium received.)
- Reward: 3 (Profit potential is capped at the premium received plus the difference between the short stock entry price and the put strike price.)
- Short the stock and sell a put option. This strategy profits from a decline in the stock price.
- Calendar Put Spread:
- Sell a near-term put option and buy a longer-term put option, both with the same strike price. This strategy can benefit from a decline in the stock price over the longer term, and from the accelerated decay of the short-term put.
- Risk: 2 (Losses are limited to the net premium paid for the strategy.)
- Reward: 3 (Profit potential can be significant if managed properly and the stock price moves as anticipated.)
- Sell a near-term put option and buy a longer-term put option, both with the same strike price. This strategy can benefit from a decline in the stock price over the longer term, and from the accelerated decay of the short-term put.
