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 July 19 put with a strike price of $450 and buying the $445 put would create a bull put spread.
This spread was trading for around $0.70 yesterday. That means a trader selling this spread would receive $70 in option premium and would have a maximum risk of $430.
That represents an 16.3% return on risk between now and July 19 if META stock remains above $450.
If META stock closes below $445 on the expiration date the trade loses the full $430.
The breakeven point for the bull put spread is $449.30 which is calculated as $450 less the $0.70 option premium per contract.
In terms of a stop loss, if the stock dropped below $460, I would consider closing early for a loss.
MSFT Bull Put Spread Example
Selling the July 19 put with a strike price of $400 and buying the $395 put would create a bull put spread.
This spread was trading for around $0.60 yesterday. That means a trader selling this spread would receive $60 in option premium and would have a maximum risk of $444.
That represents a 13.6% return on risk between now and July 19 if MSFT stock remains above $400.
If MSFT stock closes below $395 on the expiration date the trade loses the full $440.
The breakeven point for the bull put spread is $399.40 which is calculated as $400 less the $0.60 option premium per contract.
In terms of a stop loss, if the stock dropped below $410, I would consider closing early for a loss.
AMAT Bull Put Spread Example
Selling the July 19 put with a strike price of $200 and buying the $195 put would create a bull put spread.
This spread was trading for around $0.65 yesterday. That means a trader selling this spread would receive $65 in option premium and would have a maximum risk of $435.
That represents a 14.9% return on risk between now and July 19 if AMAT stock remains above $200.
If AMAT stock closes below $195 on the expiration date the trade loses the full $435.
The breakeven point for the bull put spread is $199.35 which is calculated as $200 less the $0.65 option premium per contract.
In terms of a stop loss, if the stock dropped below $210, 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.
