Options  |  APR 2008

Stocks & Commodities V. 26:4 (32-38) Bull Put Spreads by Jay Kaeppel

Bull Put Spreads by Jay Kaeppel In part 4 of this series, you’ll find out more about the bull put spread strategy. AS discussed in the first article in this series, several key factors should be considered in determining the best option trading strategy to use at any given time for a given security. In this installment we will look at a specific trading strategy — the bull put spread — and how to use the PROVEST criteria to identify trading opportunities. STRATEGY: BULL PUT SPREADS As I have stated in the past, one of the most attractive features about trading options is the ability to create positions that you cannot create by just trading a stock or a futures contract. If you trade stocks or futures directly, you essentially have three choices: You can buy long, sell short, or go flat. If you buy, you then need that security to go up in price in order to profit. If you sell short, you need that security to go down in price in order to profit. And if you are flat, you hold no position at all and cannot make or lose any money. By using options you have many other choices. In the March 2008 issue of STOCKS & COMMODITIES, I wrote about buying a straddle — simultaneously buying a call and a put on the same underlying security. That strategy offers unlimited profit potential if the underlying security makes a meaningful move in either direction. This month, we will look at another strategy that can only be implemented through the use of options. This strategy is referred to as a credit spread, because the trader actually takes in money — referred to as a credit — at the time the trade is entered. This strategy is often referred to as a bull put spread. (For the record, there is an inverse strategy known as a bear call spread. For our purposes here, we will focus on the bull put spread. However, a trader can simply use the inverse rules and logic described in this article to trade the bear call spread.)

by Jay Kaeppel