Today we are applying a Bull Put spread on CSL Limited (CSL:ASX)
Analysis:
CSL is currently trading at $298.38
The chart below shows how CSL has been trading in an uptrend since its lows in July. Recently it retraced to the uptrend line from its local highs in November. The retracement not only stalled at the uptrend line, but also at the 100 and 200 Day Moving Averages, a sign they are being used as support. In addition, the Stochastic are overbought and crossed, indicating that CSL is oversold in the short term. CSL
Today has CSL bouncing from both support and the trend line, indicating it is ready to continue higher. We can trade a Bull Put where we use the support and uptrend line defensively. We place the risk underneath these levels, and if the share price is above these levels come expiry, we make maximum profit.
We can either trade the shorter-term December 17th expiry, where the share price must remain above $290 to make maximum profit, or trade the January 21st expiry where we profit if the share price remains above $286. Both have similar profit levels, swung a little further in the January expiry’s favour.
Each have their warrant, with the obvious benefit for the shorter date expiry being only a 9 day trade. Of course, the drawback is that the share price has less room to fall than if we did the January expiry. In addition, with TMC’s being down still, practically this would be a hard trade to trade out of come expiry if things went wrong.
The January expiry’s obvious benefit is the share price can fall to $286 and you can still make maximum profit, but you also have roughly 6 weeks for the share price to do that. Of course, you wouldn’t trade this if you thought CSL was going to fall further. $286 is also a key support level for CSL, as indicated by the chart, adding another player of defence for the trade.
With both trades if CSL rallies, you can close the trade early, and if you held them to their expiry date and they were above the trend and key levels of support you would not have to pay exit fees.
The Strategy:
There are many different types of options strategies used in different market conditions. The key reasons traders use this style of strategy is that:
- Benefits from time decay (as time progresses, our trade increases in value).
- A very popular strategy used in a rising to sideways market.
- Allows for some upward movement.
- Can be used by busy people as the risk can be managed from afar.
- Has the possibility to close out for zero brokerage.