Underlying Stock – CHTR (Charter Communications 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 26 October and closed outside the Bollinger band. On Friday 27 October prices turned around and started moving up, forming a bullish “Hammer” candlestick pattern. On Monday 30 October it continued the up move and came back inside the Bollinger band and as it did, took the trade. A buy signal also flashed with my trading system. Notice RSI and MACD Histogram both pointing up (Blue arrow in the chart). Strike prices were outside the lower Bollinger band and below recent low from 27 October. No red flag.
| Side | Quantity | Symbol | Expiration date | Strike price | Type | Price | Net Price |
| SELL | 10 | CHTR | 04-Nov-17 | $307.50 | PUT | $1.40 | $0.23 credit |
| BUY | 10 | CHTR | 04-Nov-17 | $305.00 | PUT | $1.17 |
Capital required to do this trade was $2500 and have received $0.23 credit per share. Means got paid upfront $208.05 after paying commission for the trade and that’s the profit which turns out to be 8.3% return on the capital invested in 5 days. As long as prices don’t hit the sold strike prices by the expiration date (Friday 03 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 | $208.05 | ($0.23 x 100 x 10 – $21.95 commission = $208.05 |
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.