Bull Put Spread – Bullish Options Trading Strategy
A Bull Put Spread is a moderately complex trading strategy and its purpose is to profit from stock that is either stalled or rising. It was conceived to find income generating options trades that are bullish and have limited downside risks. Because of its limited risk, a bull put spread is even safe when still learning how to trade stocks.
In order to identify a stock for a bull put spread, it is necessary to perform solid stock market technical analysis. Once you find a stock that is range-bound or able to rise, you need to make a trade on the options that will expire in one month or less. At that point you should buy lower strike puts that are $5 below the higher strike price. Then sell the same number of higher strike puts that expire on the same date. (Note – both puts should have strike prices that are LOWER than the current stock price.) Your goal in such a strategy should be to earn a 12% net credit from the trade. For example, if the difference, or spread, between the two strike prices is $10.00 then you want to realize a net credit of at least $1.20 for the trade. If the stock remains steady or moves higher then the profit you earn is the net credit amount. Your risk is the difference between the strike prices minus the net credit for the complete trade. A bull put spread is relatively safe and has the potential for a nice return.
Ok, let’s complete an example of a bull put spread. Using your best technical analysis tools, you have identified ABC, Inc. (ABC) as a perfect stock for your transaction. You are able to purchase 30 Strike Put at $9.00, while ABC has a stock price of $21.00. After you purchase a 20 Strike Put at $1.00. Both purchases have the same expiration date. The plan of a bull put spread is that you are going to sell the $9.00 Put options that are in-the-money (higher priced) and buy out-of-the-money $1.00 Put options of the same stock with the same expiration date. This becomes a vertical bull put spread. If the stock has closed above the in-the-money Put option strike price on the expiration date then you will realize your maximum profit. Remember that there will be a net credit that will modify the bottom line of the completed trade. Because you have bought strikes above and below the current stock price, any movement upward works to your benefit.
Bull Put Spreads are a great opportunity to realize a profit with a stock that looks to remain steady or move upward. Adding the utilization of the bull put spread to your techniques will enhance your success in trading.
Throughout his investment career, Stephen Bigalow has directed his investment acumen towards developing improved methods for extracting profits from the investment markets. His research, encompassing all fundamental and technical methods, resulted in verifying that Candlestick analysis was superior to any other method when evaluating stocks.
In addition to Free tutorials, videos, and live trading room hosted by Stephen Bigalow weekly, you can access Steve’s daily market comments that provide insight into the markets. View member benefits for more information.
Learn how you can quickly learn to read stock charts and make money trading using candlestick patterns.