Bull Put Spread
If you want a low risk, low reward strategy about a stock that you feel positive, then the bull put spread may be the right strategy for you.
Using put options at or near the current price of the stock is a good way of creating a spread when you are positive about a stock. Novice traders may not immediately consider this option because they lack the familiarity. Once you get used to it however, it is a good low risk, low reward strategy.
For example, supposing you have a short term feeling about ABC stock. ABC is currently trading at $108.28. You might then consider selling the 110 put for $5.10 and then buying the 100 put for $1.70. Here, your maximum profit potential would be the $3,400 you got when entered the position. Your maximum loss potential would be the difference between the two strike prices minus the $3400 credit you got from entering the position. Your maximum loss will be $6,600 (((110-100) x 1000) – $3,400). In case of maximum loss of the position, your maximum loss potential is computed as the difference between the strike prices because that that is the amount that you will need in this circumstance. Take a look at the following table:
|ABC trading @ $108.28|
|Sell 10 ABC 110 Put @ $5.10||($5,100.00)|
|Buy 10 ABC 100 Put @ $1.70||$1,700.00|
|Cost of Trade||($3,400.00)|
Aside from the bull put spread, you might also want to check out the bull call spread and the bear put spread. They are similar with the bull put spread. Together, you can easily use them to meet your overall investment objectives.
|Bullish Strategies||Neutral Strategies||Bearish Strategies|