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.
AAPL Bull Put Spread Example
Apple (AAPL) is showing strength and is above the 21, 50 and 200-day moving averages. Apple is showing a 100% Buy rating with an Average short term outlook on maintaining the current direction.
Selling the December 19 put with a strike price of $275 and buying the $270 put would create a bull put spread.
This spread was trading for around $0.89 yesterday. That means a trader selling this spread would receive $89 in option premium and would have a maximum risk of $411.
That represents a 21.65% return on risk between now and December 19 if AAPL stock remains above $275.
If AAPL stock closes below $270 on the expiration date the trade loses the full $411.
The breakeven point for the bull put spread is $274.11 which is calculated as $275 less the $0.89 option premium per contract.
In terms of a stop loss, if the stock dropped below $275, I would consider closing early for a loss.
GOOGL Bull Put Spread Example
Alphabet (GOOGL) stock has been on fire lately and is rated a 100% Buy with a Strengthening short term outlook on maintaining the current direction.
Selling the December 19 put with a strike price of $300 and buying the $290 put would create a bull put spread.
This spread was trading for around $1.08 yesterday. That means a trader selling this spread would receive $108 in option premium and would have a maximum risk of $892.
That represents a 12.11% return on risk between now and December 19 if GOOGL stock remains above $300.
If GOOGL closes below $290 on the expiration date the trade loses the full $892.
The breakeven point for the bull put spread is $298.92 which is calculated as $300 less the $1.08 option premium per contract.
In terms of a stop loss, if the stock dropped below $305, 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 with an Average short term outlook on maintaining the current direction.
Selling the December 19 put with a strike price of $120 and buying the $115 put would create a bull put spread.
This spread was trading for around $0.53 yesterday. That means a trader selling this spread would receive $53 in option premium and would have a maximum risk of $447.
That represents an 11.86% return on risk between now and December 19 if HOOD stock remains above $120.
If HOOD closes below $1115 on the expiration date the trade loses the full $447.
The breakeven point for the bull put spread is $119.47 which is calculated as $120 less the $0.53 option premium per contract.
In terms of a stop loss, if the stock dropped below $125, 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.
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