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 BHP Group Ltd (BHP)
BHP is trading in an uptrend. More recently though it has sold off to return back to the uptrend line, near a strong level of support. After moving a good deal, BHP can often have a period of time going sidewards as it waits for the market to decide its next directional move.
With the Australian dollar low, our broader market trading near ten year highs, and overseas looking strong, we could see a move back towards $40. Some of our technical indicators are also indicating that BHP is oversold in the short term.
We can look to trade a Bull Put, where we can profit from a solid run higher back towards $40, but also take advantage of any sidewards movement as well. We can place our risk below the trend line and the support level so that as long as BHP stays above it by expiry, we can make maximum profit.