Date: 3/18/2021
Author: Chris Hood
Be sure to check out new episodes of my video podcast each week, where my ace pupil Brian Jones and I talk the ins and outs of options trading- and give you insights and strategy that you can immediately put to work for you in the markets.
I LOVE the fundamentals!
In options, just like on the jiu-jitsu mat, the basics will never let you down. The mount, back take, and rear-naked choke never goes out of style.
From Iron Condors to Unbalanced Butterflies, each of the 300 or so advanced options trades is just an expanded version of the first few strategies you’ll learn.
Bull put credit spreads are among the fundamental options trades.
They work well in various market conditions IF you know how to set and manage them properly.
Let’s revisit the bull put strategy just so we’re on the same page.
You’re bullish on a stock, so you sell an in-the-money put beneath the current stock price and buy another one for the same expiration deeper in-the-money.
Should the stock price stay above your short put at expiration, the spread expires worthless.
Because you sold it, you’ll keep the full premium!
As time passes and/or the stock price increases, the spread loses value. On your trading platform, red gradually becomes green, and you watch your profits grow.
Here’s an actual trade I placed just before I wrote this:
SOLD -6 VERTICAL FEYE 100 16 APR 21 21/19 PUT @.76
That’s options shorthand for sell 6 contracts of the Apr 16th 21.00 strike put and buy 6 of the 19.00 strike put.
With the price of FEYE at 21.16, I saw an excellent high-probability setup I call the slingshot.
For those interested, I explain this strategy in my Hood Talk videos on the Rogue Investing YouTube channel.
All I need is for FEYE to stay above 21.00 (my short strike) for the next 31 days.
If so, at expiration, I’ll pocket the difference between the two options.
That’s 100 x 0.76 x 6 contracts. So I stand to make $456.00.
The 19 strike put caps my max loss at $744.00.
I have no way of knowing whether or not this trade will work. Even professional traders can’t predict the future!
But I like my chances.
Even though you can never be certain how a trade will play out, what you CAN do is create an EDGE for yourself!
Edge comes from READING the charts, looking for the BEST possible setups, and closing the trade EARLY!
That’s right. I have no intention of holding this position for the whole 31 days!
Properly deployed, bull put spreads can be exceptionally high probability trades Take your profits before expiration, at 60-70% max gain, and you’ll really see your win rates and cash balance grow.
In any type of credit spread, the last 30% is the hardest work!
Let’s assume you placed that same trade on FEYE. When you sold it, you got paid 100%. With time and an increase in stock price, it loses value.
The more value it loses, the more of that premium you get to keep. As long as it stays above the 20.00 short put, you’re good to go.
Now consider this situation.
You hold the trade for 14 days, and you’ve earned 70% of the potential profit. It still has 15 days until it expires for a total gain $456.00.
You KNOW you have $319.20 if you repurchase the spread now and close the trade.
Or you could wait 15 more days to try for that extra $136.80.
Who knows what will happen in three full trading weeks? There could be a national disaster, a company scandal, or a sudden market pullback.
If so the stock could plummet. You can say goodbye to your 70% and then some. The max downside risk on this trade is $744.00.
Never forget that in trading GREED kills!
Close it out, take your money off the table, and look for another opportunity. You can even reset on the same stock if the technicals tell you to.
Two 70% gains beat a single 100% gain every time.
These percentages are not set in stone. Just make a plan and stick to it. Know your profit target and hold duration BEFORE you place the trade.
Perhaps you feel comfortable at 80% or a more conservative 60%. The choice depends on YOUR trading plan!
Just make sure to track your win rates, minimize your losses, and take enough profits that your losers don’t wipe out all your gains.
A subtle balancing act, but one you can manage.
Your long term success requires a bit of math, understanding of probability, and constant refinement of your system.
If you’re unwilling to put in this bit of work, you’ll eventually bleed your account dry. Options simply aren’t for you.
But true students of the game can expect their accounts to grow month after month.
The decision is yours!
Next time we’ll discuss the importance of trading volume for long-term success.
