In order to take advantage of this strategy, you are not going to try to predict where the market or a stock will go to in a short time frame, usually within thirty days or sixty day maximum, but where the market likyly WILL NOT GO TO in that allotted time frame. With this approach, you will have more than one way to win. When you sell options, your only concern is for the market to not go past the OTM options strike that you are short. That is paramount important in this Bull Put Spread strategy. When you sell an OTM options, or OTM option spread, you can win in three different market scenarios as opposed to the buyer only having one winning scenario.
A Bull Put Spread is definitely a bullish strategy. As a result, when you look at a stock chart, you must definitely take into consideration the trend of the underlying security. To place a successful trade, you want the stock either moves up or doesn’t move at all. For this reason, it is vitally important to place this trade in correspondence of a strong point of support. What I recommend is to scan stocks and pick the ones which are being traded close to a point of support previously detected. Then, try to place your Bull Put Spread by selling the OTM strike that is roughly at the same level of that support point or a few point lower as a safer bet and buying a further OTM strike.
Before placing a trade, make sure that there is no significant macro or micro market-moving news or earnings release until the expiration of your options.
Here is an example that I will use Bull Put Spread to earn some income on Google (NASDAQ:GOOG).
... (to be continued)
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