Underlying Stock – TSLA (Tesla Inc.)
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
Took the trade based on prices trading outside the lower Bollinger band (Purple line in the chart). General tendency is that prices comes back inside fairly quickly after trading outside the Bollinger band and stays inside for a while. Prices gapped down after the earning announcement on Thursday 02 November and closed outside the Bollinger band. On Friday 03 November prices turned around and started moving up, forming a bullish “Hammer” candlestick pattern. On Monday 06 November as it opened inside the Bollinger Band, took the trade. Couple of other factors that helped me to make the decision to take the trade –
- Thursday 02 November prices formed a “Doji” candlestick pattern, a strong reversal signal
- RSI indicator showed oversold condition, readings went below 30
There was over 90% chance that by expiration prices wouldn’t hit the sold strike price, meaning probability of success for this trade was above 90%, risk only less than 10%.
| Side | Quantity | Symbol | Expiration date | Strike price | Type | Price | Net Price |
| SELL | 10 | TSLA | 11-Nov-17 | $282.50 | PUT | $0.52 | $0.12 credit |
| BUY | 10 | TSLA | 11-Nov-17 | $280.00 | PUT | $0.40 |
Capital required to do this trade was $2500 and have received $0.12 credit per share. Means got paid upfront $98.05 after paying commission for the trade and that’s the profit which turns out to be 3.9% return on the capital invested in 5 days. As long as prices don’t hit the sold strike prices by the expiration date (Friday 10 November 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 | $98.05 | ($0.12 x 100 x 10 – $21.95 commission = $98.05 |
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.