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.
NVDA Bull Put Spread Example
Selling the June 16 put with a strike price of 255 and buying the 250 put would create a bull put spread.
This spread was trading yesterday for around $0.95. That means a trader selling this spread would receive $95 in option premium and would have a maximum risk of $405.
That represents an 23.46% return on risk between now and June 16 if NVDA stock remains above 255.
If NVDA stock closes below 250 on the expiration date the trade loses the full $405.
The breakeven point for the bull put spread is 254.05 which is calculated as 255 less the 0.95 option premium per contract.
In terms of a stop loss, if the stock dropped below 260, I would consider closing early for a loss.
LULU Bull Put Spread Example
Selling the June 16 put with a strike price of 340 and buying the 330 put would create a bull put spread.
This spread was trading yesterday for around $1.35. That means a trader selling this spread would receive $135 in option premium and would have a maximum risk of $865.
That represents a 15.61% return on risk between now and June 16 if LULU stock remains above 340.
If LULU stock closes below 330 on the expiration date the trade loses the full $865.
The breakeven point for the bull put spread is 338.65 which is calculated as 340 less the 1.35 option premium per contract.
In terms of a stop loss, if the stock dropped below 365, I would consider closing early for a loss.
PANW Bull Put Spread Example
Selling the June 16 put with a strike price of 170 and buying the 165 put would create a bull put spread.
This spread was trading yesterday for around $0.75. That means a trader selling this spread would receive $75 in option premium and would have a maximum risk of $425.
That represents a 17.67% return on risk between now and June 16 if PANW stock remains above 170.
If PANW stock closes below 165 on the expiration date the trade loses the full $425.
The breakeven point for the bull put spread is 169.25 which is calculated as 170 less the 0.75 option premium per contract.
In terms of a stop loss, if the stock dropped below 175, 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.
