Bull Put Spread and Cash Secured Put Strategy

Sorry I’ve been a little absent but I wanted to refine my new option strategy before I shared it. I made a couple of trades that went south on me and I didn’t want to share a strategy that didn’t work.

After some losses and then some wins after doing some tweaking I feel that this strategy is something that will have a high success rate.

As I started my strategy I originally only wanted to trade ETF’s because of their improbability of going under.  However I feel that you can successfully trade this strategy on reputable stocks that are trading at a discount.  

Here’s the strategy in a nutshell:

• Decide what you are willing to risk and then divide that by 100 for the 100 shares you may have to buy for on options contract. 
• That will give you the price of the underlying stock you are going to scan for.  So for instance if I am only willing to risk $4,000 then I need to look for stocks that trade around $40 a share.
• I only look for reputable companies or ETF’s and that’s about the lowest price range you will find.  A good range to trade at is around $60-$100 a share.
• For this cash-secured put strategy you need to have the money to buy 100 shares of the stock just in case you get assigned.  Our goal is to not get assigned but in case you need to save a trade that went bad you have another option of selling a call to make back some money.
• Make sure the stock is on an uptrend – the trend is your friend.
• Check the weekly options chain and look for a Bid price on the Put side of at least .60 (it can be .50)
• There should be less than a .30 difference between the Bid and Ask price.
• The strike price should be at least 2 strikes out of the money.
• Check probabilities to make sure that the probability of the option being in the money is less than 30% and the probability of it touching that price is less than 50%
• You want to execute your trade between Monday and Thursday before the next week’s option expiration to get the most premium and to take advantage of the accelerated time decay.
• Sell the put close to .60 and buy the closest put that costs .05 or less.  This is for insurance in case the trade moves against you but you don’t want to pay too much for insurance.  It makes this a bull put spread.
• Set your alerts on your trading software to notify you of 10% moves of the stock either way.  This way you can go about your day and not have to watch the stock until the end of the day. 
• If the stock starts moving against you, get out of the trade and find another stock.  But don't be too scared if the stock moves down to a technical line of support, let the trade play out especially if it's in an up trend.
• If the stock price moves in your favor be patient and wait for the next week Wednesday or Thursday before expiration and then close your positions to get as much profit as possible.

Making Money on Put Strategies

As I mentioned before in a previous post, some very successful traders use put strategies to make a lot of money in the market.  This was a very lucrative time for many traders who do.  The market was going up and people didn't know where it was going to stop.  Then instability came into the market through Cyprus, Greece and now with the attacks in Boston.  You can almost guarantee something is going to happen in a two-month time period to cause markets to destabilize and when they do the S&P, DOW and NASDAQ all go down.  The best play of course is the SPY because it responds directly to big dips in the market.  The options are also real close between the Bid and Ask price so this makes it easier to get in and out of your trade.

The market always goes up slowly and comes down fast.  You will almost never catch the market going up fast unless it is on some news that nobody but insiders know and when it does it is usually in after hours trading so you missed the run (case in point: Sprint shot up a whole point over night the other day after Dish Network said it wanted to buy them).  So the play is to wait for the market to go up and then place put options at various points going at the most two months out.  For example the market is already down today so I would wait until SPY gets back to 157 and then as it goes up place put options for the June 155 strike price.  Then wait and see what happens.  You can place your stop at 159 and your limit at around 153 (I know the options order window in TOS doesn't show the strike price but after you play around with adjusting your trade price it will show you on the chart where your options orders are).  

Yes it's great to have stop and limit orders but always watch your trades.  There are sometimes your bid doesn't go through as quickly as you would like and you could miss some profits or worse lose money.  When you see your profit margin approaching it may be a good thing to call your broker and ask him/her to place the trade for you at your trade price.  Depending on the brokerage firm they can actually execute your trade for you better than your computer.  They can find a buyer for you and make you some good money.  I've had good experiences with Trade King and highly recommend them.