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Today we are applying a Bull Put spread on Ramsay Health Care Limited (RHC:ASX)

Analysis:

RHC is currently trading at $64.60

You can see from the chart below that RHC has been trading in a broad channel pattern since roughly April. There are two key levels of resistance and support that are keeping the stock traveling sideward.

Recently, it fell from the top of the channel to the first key level of support at roughly $63. Today has it breaking the short-term downtrend line after bouncing off that key support. The stochastic at the bottom of the chart have crossed over and sit in the oversold area, indicating that RHC could be ready to rise from here.

A Bull Put spread, if set correctly, can profit from both bullish and sideward movement. This seems appropriate because despite expecting gradual bullish movement, RHC sideward trend could cause it to drift. The entire risk of the trade can be placed at the $63 key support, meaning if RHC stays above $63 by December 17th (option expiry) maximum profit is obtained. $63 can be used defensively to protect against excessive falls. If this level is broken, then it would be wise to either close the trade, or move the position out to the following January expiry, with the expectation of the next key support at roughly $61.50 holding as it represents the  bottom of the channel.

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.