Arm Holdings (ARM) is exhibiting strong bullish momentum, driven by robust financial performance and strategic positioning in the AI sector.

In its latest earnings report, Arm announced fourth-quarter revenue of $1.24 billion, marking a 34% year-over-year increase, and an adjusted net income of $210 million. This growth is attributed to surging demand for AI-capable chips, with royalties from high-end smartphone chips powered by Arm technology growing 30% despite modest increases in unit shipments. 

The Times

Analysts maintain a positive outlook on Arm's stock. Morgan Stanley has an "Overweight" rating with a $175 price target, citing the company's strong position in the generative AI market. Additionally, Raymond James initiated coverage with an "Outperform" rating and a $160 price target.

ARM BULL PUT SPREAD

Today, we’re going to look at a bull put spread trade, but instead of using a regular monthly expiration, we will look at a longer-term trade.

Longer-term option trades tend to move a little slower than shorter-term trades. That allows more time to adjust or close, but also means a lower annualized return.

As a reminder, a bull put spread is a bullish trade that also can benefit from a drop in implied volatility.

The maximum profit for a bull put spread is limited to the premium received while the maximum potential loss is also capped. To calculate the maximum loss, take the difference in the strike prices of the long and short options, and subtract the premium received.

Implied volatility is currently sitting at 52.01% which gives ARM and IV Percentile of 18% and an IV Rank of 15.75%.

To create a bull put spread, we sell an out-of-the-money put and then by a put further out-of-the-money.

If we go out to September, we could sell the September 19 put with a strike price of $95 and buy the $90 put, which would create a bull put spread.

This spread was trading on Friday for around $0.70. That means a trader selling this spread would receive $70 in option premium and would have a maximum risk of $430.

That represents a 16.3% return on risk between now and September 19 if ARM stock remains above $95.

If ARM stock closes below $90 on the expiration date the trade loses the full $430.

The breakeven point for the bull put spread is $94.30 which is calculated as $95 less the $0.70 option premium per contract.

That breakeven price is around 30.6% below Friday’s closing price. 

Conclusion And Risk Management

One way to set a stop loss for a bull put spread is based on the premium received. In this case, we received $70, so we could set a stop loss equal to the premium received, or a loss of around $70.

Another way to manage the trade is to set a point on the chart where the trade will be adjusted or closed. That could be if the stock breaks through the key level of $1115.

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.