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 side-wards, 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 side-wards 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 Commonwealth Bank of Australia (CBA)
CBA has been trading in an ascending channel since its lows in October last year. Recently, it came back to a key support and the uptrend line and stalled. Today shows CBA bouncing off the support level/ uptrend line and breaking the counter trend. This break of the triangle pattern gives credence to a bullish run for CBA.
A Bull Put could serve well in this situation, as we don’t need to rely on bullish movement. The trade will make maximum profit provided CBA holds the key support level, so the trade can consolidate for as long as it wants and we profit as time goes by. If we do see CBA rally, then we can look to close the trade early for a profit.