Bull Put Spread

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.

When learning about options don’t forget to also learn about buying calls, selling puts, and the bull call spread.

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.

 

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Bull Call Spread

Bull Call Spread – Bullish Options Trading Strategy

A “bull call spread” occurs when a modest increase in the price of the asset is expected. It is achieved by purchasing call options at a specific strike price while also selling the same number of calls of the same asset and expiration date, but at a higher strike. The maximum profit in this strategy is the difference between the strike prices of the long and short options, less the net cost of options. Most of the time, a bull call spread is a vertical spread.

The bottom line of a bull call spread is that the investor is able to buy a stock at a lower price and in turn sell at a higher price, thereby making a profit. In such a case the stocks belong to the same company but have different strike prices. This allows the investor to realize a profit by leveraging the varied strike prices against the actual price of the stock.

In this example of a bull call spread assume that a stock is trading at $28. The investor purchased one call option with a strike price of $30 and sold one call option with a strike price of $35. If the price of the stock jumps up to $45 then the investor must provide 100 shares to the buyer of the short call at $35. This is where the purchased call option allows the trader to buy the shares at $30 and sell them for $35 instead of buying the shares at the market price of $45 and selling them for a loss. A bull call spread is used by traders to create a profit when a loss seems inevitable.

While this is a profitable technique, the bull call spread involves strike and call prices as well as the typical monitoring of stock prices to be familiar with their movements. The easiest way to create a bull spread is to use a call option at or near the current market price. When buying the lower priced call and selling a higher priced one a bull call spread has been created.

In addition to learning about the bull call spread don’t forget to also learn about buying calls and selling puts.

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.

 

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Selling Puts

Selling Puts – Bullish Options Trading Strategy

Selling puts is very similar to a covered call but with a slightly different perspective. When you write a covered call you are speculating that the stock will either go up or stay the same. Also, with a covered call you must own the stock so that your risk is actually losing money to a falling stock. In order to make money with a covered call, you need the stock to go up or even go sideways.

Selling puts, however, does not require you to own the stock in advance. This is the beauty of selling puts. You can sell puts on margin; although it is necessary to research the margin requirements carefully. When selling puts margin requirements vary from broker to broker and the “premium” collected for the trade is deposited into your account on the day your trade is entered into.
There are a number of different reasons why you might want to sell a put on a stock. As mentioned earlier, with a covered call, it is necessary for the stock to go up or sideways to achieve a profit. When selling a put it is possible to make money when the stock is going down.

There are three ways you can do this and they are explained below.

  1. If the stock goes up then your put expires and you earn the premium.
  2. If the stock stays flat then your put also expires leaving you to earn the premium.
  3. If the stock drops less than the difference of the selling price and the put then you would again earn the premium.
  4. If the stock shows a weakness that you consider temporary then you can “buy back with a roll out”. This means that you buy back your option and then sell the put for the next month. This essentially buys you extra time for your stock to move positively. The entire process would move out one month and the same parameters.
  5. Finally, you can use marginable stocks in your portfolio to sell puts on additional stock which you can purchase below the current market price.

Once again, there are a number of ways to earn money selling puts, and two primary ways to lose money. First, if you hold a weak stock past its strike price and sell, you actually create a situation where you lose on your investment. Second, is if someone will “put” the stock to you at the put price. If your stock drops below the put price, minus premium, and someone puts the stock to you, you will lose money. This can be avoided with a “buy back with a roll out” or a simple buy back on your option.

Selling puts is a great way to accumulate stocks for a discounted price. This is a strategy that can potentially be used with your IRA to form a plan for long term investing. Many IRA underwriting companies may not allow you to do this; the IRS and SEC have deemed such a practice to be a suitable way to invest in your IRA.

When learning about selling puts don’t forget to also learn about buying calls.

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.

 

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Buying Calls

Buying calls is considered to be a bullish position on an underlying stock value. The investor has the chance to partake in the rise of the stock’s value for the term of the contract with a predetermined risk. Most investors will look to sell their contract at a profit, while others may choose to exercise their right to buy the underlying shares.

When buying calls, it is important to understand, that in order to exit a call you have three options. First, you can let the call expire with no value (or in other words lose the premium paid for the option). Second, you may exercise the call at the agreed upon strike price, and then turn around and sell the stock at the current market price. You then profit from the difference as a result. Third, you may sell your call when it rises in premium in tandem with the rise in the under lying stock value.

The primary benefit of buying calls is the limited risk of capital. The investor has a much smaller cash layout with a limited downside loss, and unlimited upside gain. Conversely, the options investor does not have the same rights of the individual shareholder, such as dividends and voting rights.

The idea is that the potential profit on a long call is unlimited as long as the underlying value continues to rise. Additionally, the potential loss is limited to the premium paid for the contract.

Buying Calls is a long call strategy that is best used in a bullish market where a rise in the price of the underlying stock is expected. Furthermore, when you elect to buy a long call option instead of the under lying stock, you increase your leverage and minimize the inherent risk of the trade. The most you can lose on your purchase is the cost of the premium.

Buying Calls can be a great way to increase your participation in certain stocks without tying up a log of funds. Options permit you to control a greater number of shares for less capital.

The Chicago Board Options Exchange (CBOE) provides this concise definition for Buying Calls. Buying an equity call gives the owner the right, but not the obligation, to buy 100 shares of underlying stock at a stated price (the strike price) This can be done at any time before a specific time (the expiration date). This is considered a bullish strategy since the value of the call tends to increase as the price of the underlying stock rises. This gain will increasingly reveal a rise in the value of the underlying stock when the market price moves above the option’s strike price.

The return potential for the long call is limitless as the underlying stock continues to rise. The financial risk is restricted to the total premium paid for the option, no matter how low the underlying stock declines in price. The break-even point is an underlying stock price, that is equal to the call’s strike price, plus the premium paid for the contract. As with any long option, an increase in volatility has a positive financial effect on the long call strategy while decreasing volatility has a negative effect. Time decay has a negative effect.

Option Trading requires specific training, but offers increased benefits of protecting your capital while increasing your profits.

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.

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Matching Low

The matching low candlestick pattern is similar to the homing pigeon candlestick pattern. The exception is that both days of this two-day pattern’s close are at the same low level. Since both day’s black (or red) candles close at the same level, this matching low signal indicates that the bottom is hit after a long downtrend. See criteria for matching low candlestick pattern below.

 

 

 

 

 

 

 

 

 

Criteria for Matching Low

  • The body of the first candle is black (or red) and the body of the second candle is black (or red).
  • The downtrend is evident for a good period of time and a long black (or red) candle occurs at the end of the trend.
  • The second day opens higher than the close of the previous day and it closes at the same close as the prior day.
  • For a reversal signal, further confirmation is required to indicate that the trend is moving up in direction.

Pattern Psychology Behind the Matching Low
After a strong downtrend is in effect, and after a long black (or red) candle occurs, the bulls open the price higher than the previous day’s close. The shorts get concerned and start to cover; however, the bears still have enough control to close the price at the low of the day. Again this low is the same low as the close of the previous day. The psychological impact for the bears is that the second day couldn’t close below the previous day’s close and it causes concern that this is a support level.

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.

One of the biggest misconceptions of investors is that prices move based upon fundamental reasons when in fact prices move based upon the “perception” of fundamental reasons. The Japanese Rice traders discovered this many centuries ago. Why do prices go down when good news is announced? The answer is that the anticipation of that good news was already built into the stock price.

Please continue to learn how to identify each different candlestick trading pattern as well as what that pattern indicates is occurring in the markets.

 

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