U.S. markets have been on a historic bull run since the end of the pandemic. However, many investors may start to be wary. Instead of looking for stocks for potential capital appreciation, investors can bide their time and trade bull puts for short-term income.
The bull put spread is an options trading strategy firmly aimed at profiting from moderate price increases of an underlying asset. The strategy involves selling a put option and then buying a put option at a lower strike price, resulting in a net credit.
How a Bull Put Works
If the short option expires out of the money, the trade reaches its maximum profit condition - and you keep the credit. However, if the price of the underlying asset drops below the long put’s strike price, the trade hits the maximum loss. The good thing is, like all spreads, your profits and losses are well-defined, which means you know what you’re getting into before you start the trade.
If that sounds like something you’d like to try, here are some suggested trades:
In case you’re wondering, these results were emailed to me at the end of yesterday's trading session. The results include trades on SAVA and SOXL. For this article, we’ll discuss SAVA, as it offers the most favorable outcomes for a potential bull put trade.
Stock Profile: Cassava Sciences Inc (SAVA)
Cassava Sciences Inc. is a clinical-stage biotechnology company dedicated to developing treatments and diagnostics for neurodegenerative diseases, notably Alzheimer's. Their leading therapeutic candidate, Simufilam, is an oral drug currently undergoing Phase 3 clinical trials aimed at treating Alzheimer's.
Like most clinical-stage biotech plays, SAVA stock has experienced volatility. Specifically, the price has fluctuated from $1.34 to $146.16 since it’s been listed. The good news is that the stock price has settled somewhat and has been trading around the $32 - $24 level in the past few months.
The company recently resolved an SEC investigation, leading to a $40 million fine, though clinical trials continue. Meanwhile, its last earnings report was on November 7, announcing a marginal improvement in its bottom line and an estimated $117 million to $127 million cash and cash equivalents at the end of 2024.
Furthermore, the 14-day RSI shows it recently breached the 50-level, signifying balanced trading for bears and bulls.
Most signs point to SAVA experiencing little risk of significant volatility. Unless something changes between now and the next earnings date (expected in February 2025), it’s quite possible SAVA stock will face neutral or moderately bullish price movements.
The only potential upcoming catalyst for significant price changes is the top-line result announcement for its 52-week Phase-3 trial, expected by the end of December 2024.
With that information, let’s revisit the previous bull put screen and select a trade.
Suggested Trade
In my opinion, the $12.50/$7.50-strike trade is the best bet. It has a relatively equal risk/reward ratio at 1.06 to 1, the second-highest potential max profit at $2.43, or $243 per contract, and a decent 71.69% probability of expiring out of the money.
Let’s break down the trade.
SAVA stock currently trades at $27.06. The screener suggests you write a $12.50-strike put, for which you'll get $4.10 in premium. By the way, this short strike makes this bull put trade quite safe since SAVA’s price would have to fall 54% before it even gets to that level. (Though, again, anything can happen.)
At the same time, you’ll buy a $7.50-strike put (below its current 52-week low of $8.79) for $1.67. The resulting credit is $2.43, and the maximum loss for the trade is $2.57 per share. The trade breaks even if SAVA stock trades below $10.07, calculated by taking the short strike and subtracting the premium received. All options expire on December 20, 2024.
Of course, if you’re more adventurous, you can opt for the $12.50/$5.00 bull put spread, where you can earn $3.36 against a maximum potential loss of $4.14. It has the same probability of expiring out of the money as my previous example trade, with a higher probability of profit at 79% due to the wider spread.
Trade Adjustments
As mentioned earlier, results from its 52-week drug trial are due by the end of the year, which could potentially lead to increased volatility. If the results are negative, expect the stock price to drop.
Bull puts can be adjusted or closed as needed. If the net premium rises, you can close the short put early to limit your losses. Similarly, should the net premium plummet, crystalizing a profit is never bad. For that reason, if your broker has it available, I recommend taking advantage of trading features like stop-loss and take profit orders whenever possible.
Final Thoughts on Bull Call Trades
Bull put trades can be excellent for neutral to moderately bullish trading environments. However, always remember that things can change at a drop of a dime. So, stay vigilant, no matter how safe your trade seems to be at the start, monitor your positions closely, and do your due diligence.
On the date of publication, Rick Orford 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.
