Notes for the April 28, 2010 Intermediate Trading Lab are now posted on the Trading Lab Page.
Thursday, April 29, 2010
Thursday, April 22, 2010
Intermediate Trading Lab
Notes for the April 21, 2010 Intermediate Trading Lab are now posted on the Trading Lab Page.
Thursday, April 15, 2010
Bull Put Spread - Part II
In our last post we set the stage for the Bull Put Spread. This credit spread is a favorite in a bullish market and can be used to create monthly cash flow. This post will explain how to exit the trade based upon the direction of the stock.
1. If the Bull Put Spread is completely Out-of-the-Money (OTM) and the stock remains flat, then the trader will let the position go to expiration. Be careful if the Short Put is close to becoming ATM or ITM, or it could be assigned. If the price of the stock is not close to the Short Put Strike - then let this position go to expiration. At this point, each of the Puts will expire worthless and the full credit will be realized. In other words, the Max Reward will be obtained. One other bonus is that there will be NO commission on the trade.
2. If the Stock is moving down, prior to expiration, the trader will want to consider exiting either out of the Short Put or the entire position. If the stock drops below the Short Put Strike, then there is a chance of assignment.
3. If for some reason the stock gaps or travels to a point below the Long Put, then more than likely the trader will be assigned and this is where the trader will need to exercise the Long Put, and after having been forced to buy the stock, can then sell the stock back into the market at the Long Put Strike Price. This results in the Max Risk (or Loss), but is much better than having held the stock in most cases.
The Bull Put Spread can be found by using the same searches that would be done for a Covered Call or Naked Put and is an excellent way to provide monthly income.
1. If the Bull Put Spread is completely Out-of-the-Money (OTM) and the stock remains flat, then the trader will let the position go to expiration. Be careful if the Short Put is close to becoming ATM or ITM, or it could be assigned. If the price of the stock is not close to the Short Put Strike - then let this position go to expiration. At this point, each of the Puts will expire worthless and the full credit will be realized. In other words, the Max Reward will be obtained. One other bonus is that there will be NO commission on the trade.
2. If the Stock is moving down, prior to expiration, the trader will want to consider exiting either out of the Short Put or the entire position. If the stock drops below the Short Put Strike, then there is a chance of assignment.
3. If for some reason the stock gaps or travels to a point below the Long Put, then more than likely the trader will be assigned and this is where the trader will need to exercise the Long Put, and after having been forced to buy the stock, can then sell the stock back into the market at the Long Put Strike Price. This results in the Max Risk (or Loss), but is much better than having held the stock in most cases.
The Bull Put Spread can be found by using the same searches that would be done for a Covered Call or Naked Put and is an excellent way to provide monthly income.
Wednesday, April 14, 2010
Intermediate Trading Lab
Notes for the April 14, 2010 Intermediate Trading Lab are now posted on the Trading Lab Page.
Wednesday, April 7, 2010
Intermediate Trading Lab
Notes for the April 7, 2010 Intermediate Trading Lab are now posted on the Trading Lab Page.
Tuesday, April 6, 2010
Bull Put Spread - Part I
When the market is bullish, one of the most popular spread trades is a Bull Put Spread. This is a combination trade where the trader buys a put and sells a put creating a spread trade (combination of two or more options) that creates the following risk graph from MachTrader:
The Bull Put Spread is a credit trade. When the position is entered, a credit is received into the account. The credit is the Maximum Reward that can be obtained on the trade. If the trade remains in the traders “favor” and the position goes to expiration, then the entire credit remains in the traders account. Depending on the final outcome, a partial amount of the credit may be left or a debit may occur in the account if the position has gone against the trader.
Here are some general guidelines in setting up this trade:
1. Look for a Bullish Stock
2. Set the trade so that both strike prices are below the price of the stock.
3. Buy the lower strike price Put and sell the higher strike price put.
4. Have the Strike Prices next to each other (i.e., the 210 and 220)
5. Expiration should be no more than 2 months out.
6. Try to realize a minimum net credit of 10% or more of the spread.
7. On the Short Put (the Put that is sold), have a Delta that is equal to or less than 0.20. This represents an 80% probability that the short option will be Out of the Money at expiration.
8. Place the OTM strikes of the Bull Put Spread Below support.
In placing your entry order, the trader may want to consider using a contingent order that is triggered on the price of the stock. For example, if the price of the stock goes up 10% of the ATR, then have the spread order placed. This confirms the direction of the stock (bullish).
In the next post we will discuss how to maintain and exit the position.
The Bull Put Spread is a credit trade. When the position is entered, a credit is received into the account. The credit is the Maximum Reward that can be obtained on the trade. If the trade remains in the traders “favor” and the position goes to expiration, then the entire credit remains in the traders account. Depending on the final outcome, a partial amount of the credit may be left or a debit may occur in the account if the position has gone against the trader.
Here are some general guidelines in setting up this trade:
1. Look for a Bullish Stock
2. Set the trade so that both strike prices are below the price of the stock.
3. Buy the lower strike price Put and sell the higher strike price put.
4. Have the Strike Prices next to each other (i.e., the 210 and 220)
5. Expiration should be no more than 2 months out.
6. Try to realize a minimum net credit of 10% or more of the spread.
7. On the Short Put (the Put that is sold), have a Delta that is equal to or less than 0.20. This represents an 80% probability that the short option will be Out of the Money at expiration.
8. Place the OTM strikes of the Bull Put Spread Below support.
In placing your entry order, the trader may want to consider using a contingent order that is triggered on the price of the stock. For example, if the price of the stock goes up 10% of the ATR, then have the spread order placed. This confirms the direction of the stock (bullish).
In the next post we will discuss how to maintain and exit the position.
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