As the title implies, trading credit spreads makes it possible for you to lower the risk in trading options. At the same time, you may assuming a very advantageous stance in the market.
One of the spread tactics is called bull put credit spread; this one uses a bullish bias, and it is made with put options. This is a bullish stance wherein you only want the stock price to remain at the top of the upper or higher strike price of the spread. As a summary, this kind of strategy is able to give you a profit by creating a net credit, which is formed in the difference of the sold put price as well as the bought put price. You, as an investor, may be able to keep the net credit or the difference in the premiums while the stock is going up.
A credit spread can give you a good probability of earning profit, since the profit will be derived as long as the market moves either flat or up.
This strategy includes selling or writing an option and then purchasing an option. You do this in different strike prices while you are in the same underlying stock. Selling an option will give you a credit that will go directly to your trading account. The option you purchase acts as the risk limiting factor.
Take note that in a credit spread trade, you are collecting additional money on your stance that you write. For you to get maximum possible profits, both options that are involved in the spread must expire ‘out-of-the-money’, or worthless.
Bull put credit spread is executed by doing the following:
• Sell a put with a pre-determined price.
• Purchase a put with one or more strikes under the above amount in the same month. This is your downside safety.
• You should know some of the basics like the margins. In addition to that, knowing also the maximum risk, maximum profit, net credit and break even points.
• You will gain profit if the stock prices go up.
Jeff Ziegler, author of this article is also interested in Credit spread options and recommends you to please check out some Credit spread strategies if you liked reading this information.
Tuesday, September 28, 2010
Bull put spreads explained
In an exchange market, you will have several means to earn profit. Most people know the basics such as in stocks trading. They will say that when the economy is at its low stages, you better rack up your stocks. Meaning, you have to buy stocks while the price is low. To earn, you have to sell those stocks at higher price and when the market and is moving up. In short, that is like planting the seeds in times of problem and then harvesting in times of abundance. That is a typical trading tactic.
Another term in the field of trading is the bull put spreads. This method is an independent trade that is known to utilize a combination of two put options; however, the whole thing or process is still under the one direction strategy. Under normal circumstances, a trader can sell a single put option and then buy another at a lower strike price. The spread comes from the strike price difference of the two puts.
How to create or make a bull put spread? Fist, you must identify the trend of the market. Then if it is bullish, sell an out of the money put while simultaneously purchasing a put option at a lower strike price for protection. The goal is for both to expire worthless.
Since this technique involves money, expect that there are risks as well as rewards in using put spreads. First, is the risk involved in put spreads; typically, the risk is limited to the difference between the sold put and the purchased put, less the maximum credit. On the other hand, the reward in this bull put spreads is somewhat limited to the initial credit, which is made when you enter the trade.
Jeff Ziegler, author of this article is also interested in Credit spread options and recommends you to please check out some Credit spread strategies if you liked reading this information.
Another term in the field of trading is the bull put spreads. This method is an independent trade that is known to utilize a combination of two put options; however, the whole thing or process is still under the one direction strategy. Under normal circumstances, a trader can sell a single put option and then buy another at a lower strike price. The spread comes from the strike price difference of the two puts.
How to create or make a bull put spread? Fist, you must identify the trend of the market. Then if it is bullish, sell an out of the money put while simultaneously purchasing a put option at a lower strike price for protection. The goal is for both to expire worthless.
Since this technique involves money, expect that there are risks as well as rewards in using put spreads. First, is the risk involved in put spreads; typically, the risk is limited to the difference between the sold put and the purchased put, less the maximum credit. On the other hand, the reward in this bull put spreads is somewhat limited to the initial credit, which is made when you enter the trade.
Jeff Ziegler, author of this article is also interested in Credit spread options and recommends you to please check out some Credit spread strategies if you liked reading this information.
Spreading options tactic: Bull put spreads
Option trading involves trading of options instead of the stocks in an underlying exchange market. There are so many strategic ways to earn money in options trading; one way is through the bull put spread. This strategy is an independent trade employing a mixture of two different puts; however, this one is in a specific direction. In this spread, you have to buy a put contract for any strike price. Then you have to sell a put contract with a price higher than the original purchased. The profit comes from the difference between the sold option and the purchased put. The goal is for both put options to expire worthless.
To make a bull put spread, a trader would first have to sell a put contract. Then the trader would have to buy a single put contract for protection. As the trades progress, the trader is watching for the price to move upward.
Just like any strategies, there are risks as well as rewards to consider before doing this strategy. The risk of using a bull put spread strategy is low. The risk is limited and restricted only to the difference of the strike prices between the long and short puts, less the initial credit made when entering the trade. Mathematically speaking, a trader can calculate your bull put spread risk by the following formula:
Maximum Risk = (difference in the strike price between long and short put) minus (the Initial credit).
On the other hand, bull put spread reward is limited only to the premium credit made when you enter the trade.
Jeff Ziegler, author of this article is also interested in Credit spread options and recommends you to please check out some Credit spread strategies if you liked reading this information.
To make a bull put spread, a trader would first have to sell a put contract. Then the trader would have to buy a single put contract for protection. As the trades progress, the trader is watching for the price to move upward.
Just like any strategies, there are risks as well as rewards to consider before doing this strategy. The risk of using a bull put spread strategy is low. The risk is limited and restricted only to the difference of the strike prices between the long and short puts, less the initial credit made when entering the trade. Mathematically speaking, a trader can calculate your bull put spread risk by the following formula:
Maximum Risk = (difference in the strike price between long and short put) minus (the Initial credit).
On the other hand, bull put spread reward is limited only to the premium credit made when you enter the trade.
Jeff Ziegler, author of this article is also interested in Credit spread options and recommends you to please check out some Credit spread strategies if you liked reading this information.
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