Bull Put Spread Trading
When we are conducting trading options online, we will find that there are many articles written on how to trade Bull-Put Spreads. Here we can learn a little more from each of those articles. By this article assumes that we know a little bit about options.Bull put spread term
A Bull-Put Spread is a trade similar to a Covered Call but instead of owning the stock we own
the trading options to buy the stock. It is a bullish credit spread.Good time to use it
We can trade A Bull-Put Spread in place of a Covered Call, when the trend of the stock is bullish but we are not positive, when the stock is trading sideways, when we want to invest limited funds and when we do not mind ending with the stock. If the stock price drops below the strike price of the put, we could get the stock put to us.
Bad time to use it
When the stock is bearish, do not trade a Bull-Put, we do not want to be assigned the stock. What we have to watch is our commissions, we can have four trading options involved and they may eat up our profits.
The money made
As time value is removed from the trading option price, the trading option will drop in value. When we enter the trade, we will give a credit for the trade. When closing the trade, the remaining credit or time value, will be deducted from the original credit and we will receive what is left.
Steps trading a bull put spread
Bull put trades is an out of the money trade. Sell 1 put trading options 1-2 strike below the current price and buy 1 put trading options at the next lower strike price
. If the trading options are in $2.50 increments we can buy the put 2 strike prices below the put sold.Broken down
Stock is at 33.87
- Sell the Oct $30 for $2.00 per share
- Buy the Oct $27.50 for 1.00 per share - Total credit is $1.00 per share - Maximum profit is $1.00 per share - Maximum loss is $1.50 per share
- $30 - $27.50 + Total Credit(1.00) = $1.50 - Maximum Rate of return
= 66.7%
- $1.00 / $1.50 = 66.7%
Closing Out
If the stock stays above $30 per share in example above, do nothing and just let it expire
. We need to check with broker, some brokers will close the trade for us when the trade drops below.25. If the stock movement is questionable, close out early if the remaining value of the put sold is close to.05.If the stock drops below $30, buy back the trading options sold, and sell option bought. If stock is dropping we may want to hang on the trading options bought and recover some of the loss from the sold option.
Close monitor
If stock drops significantly we can end up with a big loss
if we have purchased a large number of contracts with a wide spread. Be aware
The broker will deduct the maximum of potential loss from your account when we are purchasing a bull spread. When the trade is closed out, we will get that all back plus any credits applied. We can also get the most money from stocks that have a higher implied volatility, but we need to monitor closely
.