Bull Put (Credit) spread adjustment – Underlying stock ‘PM’

Underlying Stock – PM (Phillip Morris)

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 19 October after the earnings announcement. General tendency is that prices comes back inside the Bollinger band fairly quickly after trading outside and stays inside for a while. Prices did came inside the next day on 20 October and formed a bullish “Hammer” candlestick pattern. Next trading day (Monday 23 October) prices followed through this up movement and I took the trade. Later during the day prices came back down though. Strike prices were outside the lower Bollinger band and below recent low (lower red horizontal line drawn in the chart) from 19 October.

Capital required to do this trade was $2000 and have received $0.11 credit per share. Means got paid upfront $88.05 after paying commission for the trade and that’s the profit which turns out to be 4.4% return on the capital invested in 5 days.  As long as prices don’t hit the sold strike price by the expiration date (Friday 27 October closing price), these contracts will be worthless and I get to keep the money I received. Below is the calculation.

Managing the trade

Prices found support on Wednesday 18 Oct and bounced back up, formed bullish “Inverted Hammer” candlestick pattern. Though that wasn’t much worry for the “Bear Call” spread trade, worry came next day when it surged strongly and moved above the 20 day moving average. A “Buy Signal Day” also appeared in my trading system and that’s when I strongly felt that I needed to manage this trade. Took below steps –

1. Bought the “Bull Put” spread back at $0.25 per share on Wednesday 25 October. Total cost (10 x 100 x $0.25) + $21.95 commission = $271.95

So, lost $183.90 for the spread trade ($271.95 – $88.05).

2. When prices started moving down strongly on Tuesday 24 October, I bought  two put options with $115 strike price December expiration for $7.20 per share to defend my Bull Put spread trade. Sold those put options on Wednesday 25 October for $8.30 per share. Profit $203.10 after paying all commission.

If I would have hold the credit spread, I would have lost money (at least about $700), but I managed the trade and kept $19.20 profit ($203.10 – $183.90 loss from credit spread).

I wish I had kept those $115 strike price put options a day or two longer, I would have made killing as prices dropped by another $3.50 😀

Here is the entire transaction:

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.