Underlying Stock – BIDU (Baidu)
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
BIDU traded outside the lower Bollinger band (red lines in the chart) from 09 June till 16 June. On Friday 16 June prices held Thursday’s lowest and on Monday 19 June it bounced back inside the Bollinger Band. General tendency after prices trades outside the Bollinger Band is that it comes back inside fairly quickly and stays inside. Like an elastic band comes back to its original shape once it is released after stretching. On Monday a Buy Signal flashed with the technical indicators I use and that’s the most important deciding factor for taking any trade. MACD histogram and RSI posting up, shown by green arrows in the chart. Prices had a good move upwards during the first half of the day and that’s when took the trade. It came back down though later during the day and formed a bullish ‘Inverted Hammer’ candlestick pattern. Strike prices chosen were outside the Bollinger band and below most recent low from 15 June. It was weekly options, expiring on Friday and the probability of not hitting the sold strike prices by Friday was above 90%. Means risk of this trade is only 10%.
| Side | Quantity | Symbol | Expiration date | Strike price | Type |
| SELL | 10 | BIDU | 24-June-17 | 170.00 | PUT |
| BUY | 10 | BIDU | 24-June-17 | 167.50 | PUT |
Capital requirement to do this trade was $2500 and have received $0.12 credit per share. If successful with the trade, I would make $98.05 net profit, that’s 3.9% return on the capital invested in 5 days. 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). |
| Projected 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.