Today’s video goes step-by-step through the bull put spread strategy.
Notes
Bull Put Spread
Aka: Short put vertical credit spread
Bias: 0, +1, High Implied Volatility
Structure: Sell an OTM put option while buying a lower strike put option in the same month. Use 30 to 45-day options. (Shorter-term is more aggressive).
I’m selling puts that I hope expire worthless. The bet is that the stock stays above the short put strike.
Delta guidelines: The lower the delta, the higher the probability of profit. Generally, sell delta 0.20 or less.
A) Higher POP = Lower Reward = Less Aggressive (lower delta)
B) Lower POP = Higher Reward = More aggressive (higher delta)
ROI guidelines:
A) 10% return
i) $10-wide spread, $1.00 credit
ii) $5-wide spread, 50 cents credit
iii) $2.50-wide spread, 25 cents credit.
Spread Width:
A) Most common: $5-wide spread
B) More expensive stock: $10-wide spread
C) Minimum: $2.50-wide spread, $3-wide spread
D) If spread width is too narrow, you have to do TONS of contracts.
$100 stock
Sell Dec $95 put for $1.00 credit, Delta 0.30
Buy Dec $90 put for 50 cents debit
Net Credit/Reward 50 cents.
Max Risk $4.50
Sold 95/90 put spread. $5-wide
Risk/Reward:
Max Reward: Net Credit received
Max Risk: Spread Width – net credit ($5 – 50 cents)
Probability of Profit: 1 – short put delta (1 – 0.30)
Trigger: Same as other bull trades. Depends on the pattern. Above prior day’s high or above resistance.
Stop Loss:
1) Exit if stock breaks major support.
2) Exit if stock reaches short strike price.
Target:
1) Ride to expiration and let the spread expire worthless.
2) Exit if you make 80% to 90% of max profit.
A) $10-wide spread for $1 credit. Exit when I make 80 cents to 90 cents. Buy to close the spread at 20 cents to 10 cents.
i) Sell for $1, Buy back at 20 cents, Captured 80 cents.
ii) Sell for $1, Buyback at 10 cents, Capture 90 cents.
3) Make 50% max profit really quick, I might consider exiting.
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