Most traders can profit from a rising market – simply buy stock, right?
But what if you could not only profit from the stock rising, but also from it going sidewards, or even falling slightly? Would that give you an edge?
The Bull Put Spread, if applied properly, will do all three of these things and can provide an edge in your trading.
So what is a Bull Put Spread?
The Bull Put spread, as the name describes, is a bullish trade. If applied properly, it can also profit from sidewards movement, or even a slight fall in the market. This makes it an extremely versatile strategy.
So when would we use one?
Quite often when a stock is channelling, it trades between a strong resistance level, and support level. A bounce from a support level is a great indication the stock is likely to continue the pattern, go higher, and therefore provide a strong entry signal for a Bull Put spread.
When a stock is in an uptrend, you can often draw an uptrend line that represents a strong level of support. Once the stock has come back to the trend line, and bounces from that line, it is an indication that the stock is ready to continue the uptrend and therefore continue higher. This is also a strong entry signal for a Bull Put Spread.
Why would I use a Bull Put Spread?
We often apply this strategy in a way where we can place all of our risk below a strong support level. The support level then acts like a last line of defence to stop the stock from falling and going against us. If that level breaks, we often use it as a signal to exit the trade. If that support level holds, then we have the opportunity to close for 100% profit. The trade can then be exited for zero brokerage and fees, halving the cost of your trade.
The other reason traders like this strategy is it can be managed from afar. It doesn’t require too much attention, and is suitable for traders who perhaps work full time and don’t have the capacity to be actively trading day in day out.
Let’s run through an example.
On the 8th of March we put out a BHP Bull Put recommendation to our clients. Today we closed it for a nice profit.
The chart below is a chart of BHP and the yellow highlighted bars show both the day we entered, and the day we closed. We entered the trade because we saw that BHP had come back to the uptrend line and a key level of support. We also believed it was oversold having run down quite a lot.
With oil tracking sidewards, and Iron ore not doing us many favours, we didn’t think we would see a strong rally in BHP, so we decided to be more defensive and play both time decay and bullish movement. We set our risk below the $28.50 level, and our expiry for the 22nd of March, so we could take full advantage of sidewards movement.
This is a good example of why we like trading Bull Puts. You can see the share price ultimately went sidewards to up, yet we were able to close for 34% profit. We could have held it to expiry tomorrow and let it expiry worthless, and we could have made another 8% profit and saved on exit costs. The reason we closed it today is because it seems markets around the world, including ours and the Dow are holding their breaths for tonight’s U.S Fed announcement. If this shocks the market, BHP can move quickly and gap, so we didn’t want to risk having it gap down below $28.50.
“Please be advised: Past returns do not reflect future returns”