Why Use a Bull Put Spread?
When the stock market is relatively flat with a chance of an upward drift, a useful options strategy is a bull put spread. Why use a bull put spread? This strategy limits risk and provides a credit as the trade is set up. The worst that can happen with a bull put spread is a loss equal to the difference between strike prices of the two put contracts in the setup. The top profit is the initial credit minus fees and commissions. As we frequently mention, options traders can make money in rising, falling, and flat markets. This is flat market trade.
Access Your 7 Step Proprietary Plan That Adds the Afterburners to Your Portfolio
What Is a Bull Put Spread?
This strategy consists of two put option contracts. The profit comes from a put that you sell at a strike price below the current market price. The protection against risk comes from a put that you buy at a somewhat lower strike price than the one that you sell. The closer the strike price of the sold put to the market price the greater will be the initial credit. This will also mean that you are more likely to see the stock fall below that price and cut into your profit. The farther away the strike price of the put that you purchase from the one that you sell, the greater your initial credit. However, the greater the difference between price prices the greater is your potential loss. One of the skills learned in using this strategy is choosing strike prices that provide an optimal mix of profit and risk.
When Uncertain Use a Spread Strategy
The bull put spread is a spread strategy. This is a trade setup using different strike prices, expiration dates, or both. The rationale for using a spread is that you are not totally certain where the market is headed or when it will head there even though you have a pretty good idea. You set up these trades by purchasing and selling calls, puts, or both depending on the complexity of the spread strategy. The starting point for choosing which spread to use is your assessment of the market. The more certain that you are of where the market is headed next, the greater risk you can take with the spread. But in all cases, you will always have a stop loss built in that prevents a devastating loss if your market assessment is wrong.
Bull Call Spreads Versus Bull Put Spreads
If the market is not going to move up or down from when you set up a trade and when all contacts expire it makes no difference if you use calls or puts for your spread. In each case you will pick the same expiration dates for the contracts, sell one for a higher premium and buy one for a lower premium. In each case the contract you sell will be closer to the current market price and the one that you buy will be farther out. Because there is virtually always a likelihood that the market will rise instead of fall or fall instead of rise when it breaks out of its sideways-trading mode, either a call spread or put spread is preferable. The reason for picking a bull put spread is that you expect the market to remain flat and, if it does not, you expect it to rise. No matter how much or how little it goes up, you retain a maximum profit with your initial credit. If you expected the market to be flat with a chance of drifting lower you would use calls as that trade would remain profitable no matter how far the market fell.
The rationale for a bull put spread is relatively clear. Putting it into action by correctly timing the market, especially when events make trading uncertain, is another thing. At Top Gun Options a trader can work with a dedicated squadron, receive suggested trades, and hone their skills as they potentially earn profits in up, down, and sideways trading markets.
Free Video Shows What Changes Are Coming in the Market.
Originally published at https://topgunoptions.com on June 26, 2023.
