Underlying Stock – AAPL (APPLE)
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
AAPL is on a uptrend, in recent pullback prices went below 20 days moving average on 08 September. On next trading day (11 September) it opened reasonably above last trading days close and closed above the 20 days moving average. And a buy signal day flashed. For last couple of months, 20 days moving average have been working as a strong support and that gave me the confidence to take the trade. Red flag for the trade was that, I didn’t wait for the next day to see if the buy signal followed through and that Apple was announcing the next iPhone on Tuesday 12 September, generally market gets bit volatile with this kind of announcements. Looking at the chart, I had the confidence that prices would stay in between the Bollinger band. Strike prices sold and bought were below the lower Bollinger band.
| Side | Quantity | Symbol | Expiration date | Strike price | Type | Price | Net Price |
| SELL | 10 | AAPL | 16-SEP-17 | 155.00 | PUT | 0.38 | $0.18 credit |
| BUY | 10 | AAPL | 16-SEP-17 | 152.50 | PUT | 0.20 |
Capital required to do this trade was $2500 and have received $0.18 credit per share. Means got paid upfront $158.05 after paying commission for the trade and that’s the profit which turns out to be 6.3% return on the capital invested in 5 days. As long as prices don’t hit the sold strike prices by the expiration date (Friday 15 September 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 | $148.05 | ($0.18 x 100 x 10 – $21.95 commission = $158.05 |
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.