This week's durable goods orders and housing data do not bode well for Whirlpool

This week, we received worse-than-expected durable goods orders and housing data. In fact, existing homes sales were the worst on record for a single month.

Neither of these reports bode well for home appliances�manufacturer�Whirlpool Corporation (NYSE: WHR), and the stock will likely be negatively affected. But by how much?

A negative trend is already in place, but the stock is sitting at long-term support and may channel here for a while. Therefore, an outright short or long put is not the best trade to make in this situation, but a short option or option spread may make a lot of sense.

Let’s look at a trade that won’t need to move much to make some real money.

Trade:
Sell to open the WHR September 75/80 call spread.

Target Entry Price:
Right now the spread is paying about $1.76. I think an aggressive limit order at $1.80 has a good chance of being filled.

Exit Forecast:
If the market for WHR surprises us and the stock drops a couple of points very quickly, then the trade could be exited in the near term for 40%-50% of the original premium. However, I suspect we will see a consolidation at this level, so the trade may be on for an extended period. The option has a September expiration, so that holding period won’t be longer than 23 days.

Position Sizing:
With a short call spread, it is easier to calculate the maximum loss than an outright naked position. In this case you could consider the spread between the two strike prices ($5) minus the premium earned ($1.80) as the maximum loss ($3.20) and amount “invested.” This should help you size your position so that if things don’t work out it won’t be too disruptive.

If you want to dig into the details of the trade and learn how to execute a short vertical call spread on a b! earish s tock, watch this video.

Note: This article is for educational purposes. It is important to understand the risks of trading options before you attempt a trade like this.

This article is brought to you by LearningMarkets.com.

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