Underlying Stock – TSLA (Tesla)
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
TSLA traded outside the lower Bollinger band on 05, 06, 07 and 10 July. On 10 July prices came back inside after trading outside the Bollinger band and formed a “Hammer “candlestick pattern, a bullish move short term. Also a “Doji” candle on 07 July, a moment of indecision in the market and when it forms at the support level, it gives a indication that the market now ready for a reversal short term. On Tuesday 11 July, prices opened inside the Bollinger band and started moving up, a buy signal day flashed with some of the technical indicators I use and I decided to take the trade. Couple of those indicators are shown on the chart by the green arrows pointing up. All it means is that prices are ready to have a short term surge.
General tendency for prices is that, once it trades outside the Bollinger Band, it comes back inside fairly quickly and stays inside for a while. Like an elastic band comes back to its original shape once it is released after stretching. Took this trade based on this principle, and few of the technical indicators gave me the confidence.
Strike prices were outside the lower Bollinger band and below most recent low. There was no red flag with this trade, pretty safe trade. OTM (Out of the Money) probability was above 90% when taking this trade, meaning there was 90% 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 | TSLA | 15-July-17 | 300.00 | PUT |
| BUY | 10 | TSLA | 15-July-17 | 297.50 | PUT |
Capital requirement to do this trade was $2500 and have received $0.14 credit per share. If successful with the trade, I would make $118.05 net profit, that’s 4.7% 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 = $2000). |
| Projected Net profit | $118.05 | {($0.14 x 100 x 10) – $21.95 (commission)} = $118.05 |
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.