Underlying Stock – AMZN (Amazon)
Strategy – Bull Put (Credit) Spread
The strategy involves selling an Out of the Money Put Option of an underlying stock and buying further out (most often the next strike price) less expensive Out of the Money Put Option for protection. These selling and buying different strike price put options creates a credit and that’s the maximum profit for the trade if successful. Maximum loss will be the difference between sold and bought put option strike prices.
Outlook and Action
Prices traded outside the Bollinger band on Thursday 10 & Friday 11 August, general tendency is that once it trades outside the Bollinger band, it comes back inside fairly quickly and stays inside for a period of time. Friday 11 August, prices came back inside the Bollinger band and formed a bullish “Hammer” candlestick pattern. Same day, couple of technical indicators RSI and MACD Histogram pointed upwards (shown by green arrows in the chart) indicating prices are probably ready to have a short term surge. On Monday 14 August, prices gapped up (fairly strong signal of a price surge) and followed through the buy signal and I took the trade. Strike prices were below recent low from 11 August and outside the Bollinger band.
| Side | Quantity | Symbol | Expiration date | Strike price | Type | Price | Net Price |
| SELL | 10 | AMZN | 19-August-17 | 945.00 | PUT | 1.31 | $0.17 credit |
| BUY | 10 | AMZN | 19-August-17 | 942.50 | PUT | 1.14 |
Capital required to do this trade was $2500 and have received $0.17 credit per share. Means got paid upfront $148.05 after paying commission for the trade and that’s the profit which turns out to be 5.9% return on the capital invested in 5 days. As long as prices don’t hit the sold strike prices by the expiration date (Friday 18 August closing price), these contracts will be worthless and I get to keep the money I received. Below is the calculation.
| Capital requirement/maximum loss | $2500.00 | 10 contracts, each options contract consist of 100 shares, $2.50 spread between strike prices (10 x 100 x $2.50 = $2500). |
| Net profit | $148.05 | ($0.17 x 100 x 10 – $21.95 commission = $148.05 |
As you can see by the chart it didn’t actually turn out what I hoped for, prices turned around and started going south due to some recent news with Donald Trump’s economic council and then Barcelona terrorist attack. It doesn’t always works out how you planned.
I was monitoring the trade closely and was ready to manage it if needed. I had strong feeling that prices would hold support from 11 August till expiration. If prices would have broken through that support level, I would have taken steps to defend my position.
P.S Please note that the trade is now closed. Do not copy and place a trade unless you are an expert and know what you are doing. This writing is only for educational purposes. Trading is risky without proper knowledge, practice, expertise and mentorship.