Identify Trading Opps With Provest
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.
FIGURE 1: BULL PUT SPREAD. On this weekly chart of LLY you can see that the stock price is at a critical support level that it has held since late 2004.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.)
...Continued in the April issue of Technical Analysis of STOCKS &
COMMODITIES
Excerpted from an article originally published in the April 2008
issue of Technical Analysis of
STOCKS & COMMODITIES magazine. All rights reserved. © Copyright
2008, Technical Analysis, Inc.
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