DJT Stock Price Plummets! Is It Time to Short?

As the "Trump Trade" gains momentum, shares of Trump Media & Technology Group (TMTG), owned by former U.S. President and Republican presidential candidate Donald Trump, have been climbing over the past month. However, since Wednesday, the stock’s upward trend has reversed. This pullback has also reduced Trump's net worth by over $1 billion.

On Wednesday, TMTG’s stock plunged 22%, marking its worst day ever and reversing the strong gains from earlier in the week. On Thursday, the stock continued to drop by nearly 12%, with trading halted several times due to significant volatility.

Despite these drops, TMTG’s stock has surged nearly 120% over the past month, nearly doubling Trump’s net worth to $8 billion. Earlier in the week, TMTG’s valuation briefly soared above $10 billion, surpassing its biggest competitor, X (owned by Elon Musk), whose latest valuation is around $9.4 billion.

The rise in TMTG’s valuation isn’t based on fundamentals but is linked to Trump's chances of winning the presidential election. As a quintessential “Trump stock,” it’s popular among retail traders, who see it as a speculative bet on Trump’s return to the White House.

With the election approaching, TMTG's stock price is expected to remain volatile. For bearish investors, a bear call spread could be a way to short the stock amid DJT’s rally.

What is a Bear Call Spread?

A bear call spread is an options strategy where the trader expects the underlying asset’s price to decline over time. The trader aims to short the asset while limiting potential losses.

Specifically, a bear call spread involves buying a call option at a specific strike price while simultaneously selling an equal number of call options at a lower strike price, with both options having the same expiration date.

Example: Shorting DJT

Let’s use a bear call spread to short DJT, which currently trades at $36.15. If an investor expects the price to drop to around $10 by December 20, they can implement a bear call spread on DJT.

1. Step 1: Sell a call option with a $10 strike price, expiring on December 20, and collect a premium of $2,538.

2. Step 2: Buy a call option with a $36 strike price, expiring on the same date, costing $1,110.

• Sell: $10 strike call, receiving a premium of $2,538.

• Buy: $36 strike call, paying a premium of $1,110.

• Net Premium: $2,538 - $1,110 = $1,428 (this is the maximum potential profit for the strategy).

Profit and Loss Analysis

1. Maximum Profit The maximum profit is $1,428, which is the net premium collected. If DJT's price remains below $36 at expiration, both the $10 strike call sold and the $36 strike call purchased will expire worthless.

2. Maximum Loss Since the difference between the two strike prices is $26, the maximum loss would be:(36 - 10) \times 100 - 1,428 = $1,172

3. Breakeven Point The breakeven point is when DJT’s price reaches $36 + (1,428 / 100) = $50.28. If DJT’s price exceeds $50.28, the strategy will begin to incur losses.

The main advantage of a bear call spread is reducing the risk of shorting (buying the higher strike call helps offset the risk of selling the lower strike call). If the stock rises, a short position theoretically carries unlimited risk, whereas a bear call spread greatly limits the downside compared to directly shorting the stock.