Today we are applying a Bull Put spread on ASX 200 Index (XJO)
Analysis:
The XJO is currently trading at 5,683 points.
As described from the chart below, the XJO has broken the downtrend line today following a strong rise in the U.S on Friday. A catalyst for this break was the U.S Federal Reserve chair moving his stance on their cash rate to neutral. Some would argue this is following pressure from the market with the strong falls it recently experienced. Trump also set a bit of precedence calling out the Fed for being “crazy”.
Our market has followed on, and the break could indicate further bullish movement for our market, but we also need to consider a couple other factors. Firstly, the market is still trading in a downtrend, and is so until we start to see higher peaks and troughs. That being said, it has arguably been trading in a sidewards pattern, spending the majority of its time over the past couple of months between 5,775, and 5550. Secondly, the market seems to be rather tumultuous, probably due to all the mixed news out there (economic and political), so a rally could be subdued or volatile.
Considering the break though, we could consider a simple Bull Put with the sold leg at around 5,550 or lower. This support will help protect the trade, and provided the XJO stays above support come expiry, we can make maximum profit. This means the trade will profit from both time decay and bullish movement.
We could also consider turning this trade into an iron condor, which would be to also add in a Bear Call (the exact opposite of a Bull Put) and place the risk above the next support of 5,775. This would make the trade only profit from time decay, where we would want to see the market between 5,775 and 5,550 between now and expiry day. You may want to wait though if you believe the market is likely to continue higher from here.
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 a far.
- Has the possibility to close out for zero brokerage.