The S&P 500 is set to end the year with more than a 20% return—the second year in a row. However, low trading volumes, reduced rate cuts, and the uncertainty surrounding Donald Trump’s presidency are expected to make waves during the first few months of 2025. Volatility can be either a good or a bad thing, depending on your trade idea. Still, most analysts, including myself, are optimistic about the market, making it a good time to trade bull puts.
What Are Bull Puts?
A bull put is an intermediate-level options trading strategy that involves buying a put, and selling another at a higher strike price on the same underlying asset with the same expiration date. The strategy aims to profit off the asset's anticipated moderately bullish price movement. Setting up the trade results in a net credit.
The maximum profit of the trade is the net credit received at the start, while the maximum loss is the difference between the strike prices minus the credit received. The goal of the trade is for both trade legs to expire out of the money, thus allowing you to keep the net credit. Alternatively, you can close the trade prior to expiration- ideally at a profit.
Trade Outcomes
Bull puts have three main potential outcomes. Here are all of them laid out:
- Asset Price Trades Above The Short Strike at Expiration: The trade ends at the maximum profit or the net credit received.
- Asset Price Trades Below The Long Strike at Expiration: The trade ends at the maximum loss, calculated by subtracting the net credit from the width of the spread.
- Asset Price Trades Between the Long and Short Strikes at Expiration: The trade ends either at a partial loss or partial profit, depending on how close it is to the relevant strike prices.
As you can see, these scenarios cover what happens when the trade expires. Of course, options trading is flexible, and most strategies can be adjusted, rolled, or turned into something else, depending on the situation and your end goal.
Using Barchart to Look For Bull Put Trades
Barchart’s Option Screener is the perfect tool for looking for potential bull put trades. Let me show you how, and then discuss a sample trade that I like and see how I might take advantage of volatility.
First, I jumped on to the Options Screener and used the following filters (I’ll discuss the most relevant ones along the way):
- Number of Analysts: 16 or more. This strategy aims to find big, well-covered companies, so we’ll start with analyst coverage.
- Current Analyst Rating: 2.5 (Hold) to 5 (Strong Buy). I prefer not to have companies that are sell-rated, as it would go contra to the strategy.
- Market Cap: More than $100 billion. To round out my thesis, I screened for companies with large market caps.
- Days to Expiration: 0-60 days. This gives me ample time to adjust the trade if necessary.
- OTM Probability: 80% or more. Finally, I set the probability of expiring out of the money to more than 80%.
- Other Filters: Left as default. Barchart provides default filters and values for different option trading strategies. I left those alone.
After running the screen, I got the following trades, and then arranged them from lowest to highest risk/reward profiles.
Of the results, I like the one on Palantir (PLTR) most. So, let’s use that as an example.
Trade Breakdown
According to the screener, I can sell a $57.50-strike put option on PLTR and get $1.55 in premium, then buy a $50-strike put for $0.75. This brings my net credit to $0.80 per share or $80 and my maximum loss to $6.70 or $670 per contract on the entire trade. All options expire on February 21, 2025, 52 days from now, and it has an excellent 84.97% chance of expiring out of the money.
Take-Profit and Stop-Loss Strategy
Like many traders, I like to close out my options trade before expiration to avoid assignment risk. Sure, my profits are slightly lower, but they’re crystalized. I set my take-profit price at about 80% for most trades.
As the stock price moves up, the net premium will go down. Investors might consider closing out this trade if the premium drops to around $0.16 (meaning it costs $0.16 to close the trade). If that happens, the trade will net $64 per contract - or 80% of $80.
On the other hand, if this trade doesn’t go my way and the price of PLTR approaches my short strike, I can take advantage of higher premiums and volatility, and roll the puts to lower strikes with the same expiration date. I’d likely roll if the net premium moves above $1.10.
Final Thoughts
Bull puts can be used during moderately bullish and slightly volatile market conditions, which I believe we are in. Of course, every situation is unique, so it’s always best to perform your own analysis, backtest your strategies whenever possible, and consider the chosen stock’s individual performance against the overall market sentiment.
*This article was updated to correct the net profit amount, should the investor close the trade at $0.16.
