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The market continues to show some encouraging signs and if that continues, bull put spread trades could do well.
To execute a bull put spread, an investor would sell a naked put and then buy a further out-of-the-money put to create a spread.
A bull put spread is considered less risky than a naked put, because the losses are capped thanks to the bought put.
The following trades are short-term and high risk, so should only be considered by experienced option traders.
AVGO Bull Put Spread Example
Broadcom (AVGO) is above the 21, 50 and 200-day moving averages and is showing a 100% Buy rating with an Average short term outlook on maintaining the current direction.
Selling the February 28 put with a strike price of $220 and buying the $215 put would create a bull put spread.
This spread was trading for around $0.95 on Friday. That means a trader selling this spread would receive $95 in option premium and would have a maximum risk of $410.
That represents a 23% return on risk between now and February 28 if AVGO stock remains above $220.
If AVGO stock closes below $215 on the expiration date the trade loses the full $410.
The breakeven point for the bull put spread is $219.05 which is calculated as $220 less the $0.95 option premium per contract.
In terms of a stop loss, if the stock dropped below $225, I would consider closing early for a loss.
PLTR Bull Put Spread Example
Palantir (PLTR) stock has been on fire lately and is rated a 100% Buy with a Strongest short term outlook on maintaining the current direction.
Selling the February 28 put with a strike price of $110 and buying the $105 put would create a bull put spread.
This spread was trading for around $0.80 on Friday. That means a trader selling this spread would receive $80 in option premium and would have a maximum risk of $420.
That represents a 19% return on risk between now and February 28 if PLTR stock remains above $110.
If PLTR closes below $105 on the expiration date the trade loses the full $420.
The breakeven point for the bull put spread is $109.20 which is calculated as $110 less the $0.80 option premium per contract.
In terms of a stop loss, if the stock dropped below $110, I would consider closing early for a loss.
HOOD Bull Put Spread Example
Robinhood Markets (HOOD) is also in a strong uptrend, is rated a 100% Buy and ranks in the Top 1% of all short term signal directions.
Selling the February 28 put with a strike price of $61 and buying the $56 put would create a bull put spread.
This spread was trading for around $0.80 on Friday. That means a trader selling this spread would receive $80 in option premium and would have a maximum risk of $420.
That represents a 19% return on risk between now and February 28 if HOOD stock remains above $61.
If HOOD closes below $56 on the expiration date the trade loses the full $420.
The breakeven point for the bull put spread is $60.20 which is calculated as $61 less the $0.20 option premium per contract.
In terms of a stop loss, if the stock dropped below $61, I would consider closing early for a loss.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
