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 provides 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; making 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.
The chart below is of Transurban Group (TCL)
TCL has been trading in a strong uptrend since October last year. Recently it came back to both the uptrend line and a key level of support. Since, it has travelled sidewards along the trend and support level in tight consolidation.
We can use a Bull Put here where we place all our risk below both the support and the uptrend line which should help protect the trade. It would make sense to use at least the support level as a technical stop to preserve capital if the trade goes against us. If TCL continue to travel sidewards, if set up correctly, as long as TCL stays above the support level, we can make maximum profit by the expiry of the trade. If TCL does move in the direction of the trend (which stocks generally do), then we can also look to take a profit early with a strong enough rise.
You can see, the Bull Put allows us to profit from both sidewards and bullish moves, and so a stock that doesn’t seem to be going anywhere, but has an underlying trend is usually a good candidate for this strategy.