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Today we are looking at applying a Bull Put Spread on Wesfarmers Ltd (WES)

Analysis:

WES is trading at $48.55.

WES recently returned to the key support at roughly $47.65. This has been both a support and resistance historically and more recently marks the low for WES. The short term stochastic are also in the oversold area and pointing up.

The short-term downtrend has broken, but there is still fair concern that it is trading in a broader downtrend.

Instead of trading a directionally driven bullish position, we can use the key support at $47.65 defensively and implement a sidewards trade using Options. This way, we can place the risk of the position below support and provided the share price remains above it come expiry, maximum profit is made.

Let’s have a closer look:

Max Risk: $4,820.4

Max Reward: $1,112.4 (premium received).

As the payoff matrix below shows, provided WES stays above the key support at $47.65 by the 28th of April maximum profit is made. If we see a short run to roughly $50.50 then early profit taking is on the table, but overtime the amount of movement needed to take a good profit is reduced.

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