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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
Selling the April 21 put with a strike price of 155 and buying the 150 put would create a bull put spread.
This spread was trading yesterday for around $0.40. That means a trader selling this spread would receive $40 in option premium and would have a maximum risk of $460.
That represents an 8.7% return on risk between now and April 21 if AAPL stock remains above 155.
If AAPL stock closes below 150 on the expiration date the trade loses the full $460.
The breakeven point for the bull put spread is 154.60 which is calculated as 155 less the 0.40 option premium per contract.
In terms of a stop loss, if the stock dropped below 157, I would consider closing early for a loss.
MSFT Bull Put Spread Example
Selling the April 21 put with a strike price of 277.50 and buying the 225.50 put would create a bull put spread.
This spread was trading yesterday for around $0.55. That means a trader selling this spread would receive $55 in option premium and would have a maximum risk of $445.
That represents a 12.36% return on risk between now and April 21 if MSFT stock remains above 277.50.
If MSFT stock closes below 272.50 on the expiration date the trade loses the full $445.
The breakeven point for the bull put spread is 276.95 which is calculated as 277.50 less the 0.55 option premium per contract.
In terms of a stop loss, if the stock dropped below 280, I would consider closing early for a loss.
META Bull Put Spread Example
Selling the April 21 put with a strike price of 200 and buying the 195 put would create a bull put spread.
This spread was trading yesterday for around $0.45. That means a trader selling this spread would receive $45 in option premium and would have a maximum risk of $455.
That represents a 9.89% return on risk between now and April 21 if META stock remains above 200.
If META stock closes below 195 on the expiration date the trade loses the full $455.
The breakeven point for the bull put spread is 199.55 which is calculated as 200 less the 0.45 option premium per contract.
In terms of a stop loss, if the stock dropped below 205, 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.
