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.
META Bull Put Spread Example
Selling the October 18 put with a strike price of $530 and buying the $525 put would create a bull put spread.
This spread was trading for around $0.80 yesterday. 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 October 18 if META stock remains above $530.
If META stock closes below $525 on the expiration date the trade loses the full $420.
The breakeven point for the bull put spread is $529.20 which is calculated as $530 less the $0.80 option premium per contract.
In terms of a stop loss, if the stock dropped below $540, I would consider closing early for a loss.
ARM Bull Put Spread Example
Selling the October 18 put with a strike price of $125 and buying the $120 put would create a bull put spread.
This spread was trading for around $0.85 yesterday. That means a trader selling this spread would receive $85 in option premium and would have a maximum risk of $415.
That represents a 20.5% return on risk between now and October 18 if ARM stock remains above $125.
If ARM stock closes below $120 on the expiration date the trade loses the full $415.
The breakeven point for the bull put spread is $124.15 which is calculated as $125 less the $0.85 option premium per contract.
In terms of a stop loss, if the stock dropped below $130, I would consider closing early for a loss.
NOW Bull Put Spread Example
Selling the October 18 put with a strike price of $875 and buying the $870 put would create a bull put spread.
This spread was trading for around $1.25 yesterday. That means a trader selling this spread would receive $125 in option premium and would have a maximum risk of $375.
That represents a 33.3% return on risk between now and October 18 if NOW stock remains above $875.
If NOW stock closes below $870 on the expiration date the trade loses the full $375.
The breakeven point for the bull put spread is $873.75 which is calculated as $875 less the $1.25 option premium per contract.
In terms of a stop loss, if the stock dropped below $900, 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.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
