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 channeling, 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 Bank of Queensland Limited (BOQ).
BOQ has sold off significantly over the past couple of years. Recently though, it has shown us that it doesn’t want to head much lower by creating a channel at key support. The bottom of the channel is a key support at $8.75. It has failed to get through this level on many accounts lately which indicates it wants to hold and head back up back towards the top of the channel at $9.50.
It’s a stock that can do nothing and go sidewards for periods of time, but also have a good quick run. With the Bull Put we can take advantage of both bullish and sidewards movement. We can place all our risk underneath the bottom of the channel and the key support at $8.75. That support level should protect the trade, and we only need to take action if that level is broken. So we would be using $8.75 as stop loss trigger level.
Otherwise, if we see a good run back $9.50 we can close the trade early and take a good profit or if BOQ just travels sidewards and doesn’t do anything, then on expiry we make maximum profit and half our transaction costs.
You can see this is a good way to not only take advantage of bullish movement, but to also actually profit as you wait for it to do so.