Underlying Stock – GS (Goldman Sachs)
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
GS found support on the lower bollinger band (purple lines in the chart) on 24 July, prices bounced back up on 25 July and a buy signal day flashed. Took the trade on the same day as the signal day as between 21, 24 & 25 July it formed a classic “morning star” candlestick pattern. I generally wait next trading day to see if prices are moving towards the same direction as the signal day. This case as it was backed up by a strong candlestick pattern, took the trade on the same day. 1st day (21 July) a long red candle, 2nd day( 24 July) prices gapped down, small body and looked like a “inverted hammer” candlestick pattern, 3rd day(25 July) prices gapped up and had a strong upward move, that gave me the confidence to take the trade. 2nd days candle portray moment of indecision in the market, don’t know if to take the prices down or up. 3rd days candle shows that the Bulls are back in the market and would drive the prices up. Also notice couple of technical indicators shown on the chart by green arrows pointing up, meaning most likely prices would have a short term surge.
Prices generally bounce back after hitting upper and lower Bollinger band, like an elastic band comes back to its original shape once it is released after stretching.
Strike price were below recent low from 24 July and outside the Bollinger band. There was no red flag with this trade, pretty safe trade. OTM (Out of the Money) probability was above 89% when took this trade, meaning there was 89% chances that the prices would not hit the sold strike price by the expiration date.
| Side | Quantity | Symbol | Expiration date | Strike price | Type |
| SELL | 10 | GS | 29-July-17 | 217.50 | PUT |
| BUY | 10 | GS | 29-July-17 | 215.00 | PUT |
Capital requirement to do this trade was $2500 and have received $0.21 credit per share. If successful with the trade, I would make $188.05 net profit, that’s 7.5% return on the capital invested in 4 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 | $188.05 | {($0.21 x 100 x 10) – $21.95 (commission)} = $188.05 |
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.