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In our article from January 23, 2024, we introduced you to three bull put spreads on different stocks. Two of the trade ideas delivered to the expiry date the maximum profit, while the trade idea on Adobe didn’t work.
In this article we will once again provide you with trade ideas for Bull Put Spreads before that with maximum stake of $440 a return of at least 13% and at the same time high Safety pad offer. The terms of the options are short: all proposed bull put spreads expire on June 21, 2024 at the latest.
Options Trade Ideas for Bull Put Spreads: Strict Criteria for Selection
This analysis is about finding the “pearls” among stocks that qualify as bull put spread candidates.
Only stocks of companies for which the average Options trading volume is at least 5,000 contracts per day.
The range between Bid and ask price of options combinations should not exceed 1 US dollar. This ensures that you can enter the positions under favorable conditions.
For the option combinations, the difference between the selected base prices may be a maximum of $5, so that the Stake per contract is less than $500. This stake is also the margin and corresponds to the maximum risk of loss.
Die expected return should at least 13 % even if the underlying stock only moves sideways. This means that the premiums collected from the bull put spreads, which also correspond to the maximum profit, are more than 13% of the stake.
The Safety pad should be at least 7%. This means that the difference between the current share price and the strike price of the sold option of the respective spread, plus the premium collected, is approximately 7%. In other words: With a bull put spread, the stock can fall by around 7% (even more under the candidates presented) without leaving the profit zone.
The “delta” of the option sold should be below 20, so that the Probability of winning the combination of options is particularly high.
Our result of the analysis for the bull put spreads
After applying the above criteria, 3 possible bull put spreads currently stand out that meet the strict conditions of a potentially successful trade:
The analysis was carried out in such a way that the option combinations always correspond to Midpoint between the ask price and the bid price traded.
The featured companies will not publish quarterly results during the term of the options. Options usually become more expensive a few weeks before quarterly results are published. Entries into bull put spreads become more attractive because higher premiums can be collected. However, quarterly results may cause large price fluctuations on the day of publication. This risk is accordingly eliminated among the candidates presented.
We take a closer look at the Bull Put Spread on Netflix. The return of 14.9% in just 46 days represents an annual return of around 119%. This return will be achieved if the stock trades above $535 on June 21, 2024. The loss zone only begins below a price of $534.35 (this is the “breakeven” and is determined by deducting the received premium of $0.65 from the strike price of the put sold). With respect to the current price of $579.34, an investor has a safety cushion of 7.8%.
History of Netflix shares over 1 year
Netflix share: chart from May 4, 2024, price: $579.34, symbol: NFLX | Source: TWS
Netflix shares corrected slightly in the wake of the quarterly results. If the stock closes above the strike price of $535 at expiration (end of the blue line on the chart above), the premium of $65 per contract is captured as profit.
Although the bull put spreads presented here seem particularly promising, that does not necessarily mean that the trades will work out. Even a high safety cushion of more than 7% can be broken if the markets generally weaken or company-specific events negatively impact a stock.
The principle of the bull put spread
With the Bull Put Spread options strategy, a Bought put option and at the same time another Put option sold with a higher strike price (Long Put und Short Put). Both options are from the money, meaning their strike prices are below the current share price of the underlying stock. This combination of options gives you one bonus, which corresponds to the maximum possible profit. The Risk a bull put spread is on the bet limited: There is no obligation to make additional contributions.
The terms of both options are the same: Bull put spreads therefore belong to the so-called category „Vertical“ Spreads.
A bull put spread is very simple to implement. For example, you can trade it as an options combination in a single transaction. The OptionTrader in the TWS trading platform is suitable for this. You can read about the advantages of option combinations in our article “Comparison: Option combinations versus simple options”.
The expiration date of the options will be the market close the entire position was closed out.
Die Expectation is that the Stock quoted above the higher strike price of the bull put spread at the expiration date. During the term of the position, it may also slip below it temporarily, but in order to generate the maximum profit, it must be above it again at the end of the term.
How to find the necessary options in your trading platform
Several roads lead to Rome to trade a bull put spread. In our Video Find out how to find the appropriate options using the OptionTrader on the TWS trading platform. If you have the StrategyBuilder Using OptionTrader, you can buy the options with just one trade, you don’t have to trade them individually: You can trade combined options in a single transaction, both at the opening and closing of the trade.
A notice: The purchase of a bull put spread corresponds to this sale of a bear put spread. Depending on which trading method you use, you will find one or another designation in your portfolio. If you create a bull put spread with StrategyBuilder kaufenbuy it for one negative Limit price. If you have a bear put spread sellsell it for one positive Limit price. No matter which method you use, the result is identical.
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Conclusion: Attractive bull put spreads with high income for every stock market situation
With bull put spreads, you know immediately when you enter the position what the maximum profit and maximum risk of loss will be. Both are clearly defined and limited. The maximum profit is also achieved if the stock only moves sideways.
Due to the current high market fluctuations, you must always assume that even high safety cushions may not be enough to make a profit with bull put spreads.
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