Today we are applying a Bull Put spread on Harvey Norman Holdings Limited (HVN), which has recently bounced off a key support.
Analysis:
HVN has been trading in a long term uptrend since roughly the start of the year. Recently it came down with the rest of the market and found support at roughly $4.10. This is historically a key level of support and where the uptrend line comes in. With the rally today and the market looking strong, we could expect HVN to head back towards its highs of $4.65.
HVN seems to drift and trend in one direction for good periods of time, so instead of just buying the stock, we can look to implement a Bull Put spread. If setup correctly, this provides the ability to not only profit from bullish movement but also time decay. We can set up the Bull Put in a way where our risk is placed underneath the key level of support and the uptrend line. This provides much greater flexibility in your trading. We can then use the support and uptrend line as defensive positions and if HVN stays above it by expiry, we make maximum profit. If we see a rally, we can always close early, but ultimately we don’t care too much what the stock does, as long as it doesn’t break those key levels.
If by expiry HVN is above the $4 mark, not only do we make maximum profit, we also avoid paying brokerage on the way out.
The Strategy:
There are many different types of options strategies used in different market conditions. The key reasons trader’s use this style of strategy is that:
- Benefits from upward movement.
- Benefits from time decay (as time progresses, our trade increases in value).
- A very popular strategy used in a rising to sideways market.
- Can be used by busy people as the risk can be managed from a far.
- Has the possibility to close out for zero brokerage.