Welcome to Wall Street, Main Street and Me


Friday, February 24, 2012

Romancing the Weekly Bull Puts and cheering for Options Animal (Wall Street)

My love affair with Options Animal and the weekly option bull puts continues!~ As long as the market continues in an uptrend, I am finding it a wonderful way to begin to recoup my losses and find my way back from a disastrous 2011.

I feel like I owe my entire trading career to Options Animal for their patient and wonderful classes, their coaches who have true teaching ethics, and their vision of making professional traders of their students, with independent minds and the capabilities to trade as one chooses--not some cooky-cutter, one size fits all, type of philosophy.

This is a tiny sample of Option Animal's "input" on the bull put. The clarity of their webinars is better than anything on the internet. Mind you, they do NOT teach us to use weekly options! They tend to feel they are too risky, so here is a prime example of a student taking their teaching and running with it on my own.



The way it works is: You SELL a Put option Out of the Money at a higher strike price than the Put option you BUY. (Ideally, the short option will be at the support level of your stock chart, and the long option will be one level below it). The difference between the premium you take in and the premium you pay out is a credit, and you keep it (the maximum reward) if the trade is successful.

The maximum loss is the difference in the short and long put strike prices, less the credit you take in.

The trade is successful IF the price of the underlying equity doesn't drop enough to "touch" your short put option by expiration. So, at the end of the week, if the equity has stayed stagnant or gone up, your short put is "safe" and you keep the moola.

The reasons I love this strategy.

1. With weekly options, you only have to wait one week to see if your trade is successful. I am an impatient person, so it suits my Type A. (most option trades can last a month or longer unless you day-trade).

2. You can trade a few different equities for 2 or 3 contracts on several different equities and still make $500 or $600 a week, without having to buy 20 or 30 contracts on one equity, thus risking 'the farm.'

3. For me, having a small fund, I don't like too much of my cash in play. With bull put spreads,(and all credit strategies) the broker "freezes" your maximum possible loss on each trade, to be sure you can pay. (They call it an "option requirement" on OptionsXpress.) I like this, as it puts a LOT of my cash out of play, thus automatically limiting my greed and willful ways. When the trade is over, that 'hold' is released, and the funds can then be used to trade again. The freeze on my cash annoys me, as I tend to be a cowboy trader, but in truth I am grateful that someone has some reins on me. And it gives me pause when I am calculating a trade and/or the number of contracts to buy.

For example, if I sell an Apple put with a strike price of $400 and buy an Apple put with a strike price of $350, the difference in strike prices is $50. $50 times 100 shares (per contract)=$500 per contract that my broker will "hold" until the trade is over. If I buy two contracts, it's $1000, etc. It makes a difference in managing your fund and how you want to trade.




Option trading is risky. Without education, it is financial suicide. But I can't think of one other thing I could do, sitting at my desk every day, at age (we won't discuss that right now) that could be more lucrative and fascinating. Exciting and challenging! My goal is to be a professional trader.

##

2 comments:

  1. Hello Bev
    have you still trading bull put spread.if do would like to know which stocks option are good to trade on. I was looking some stocks but premium was not good enough.
    I am a newbee looking to do paper trade.

    ReplyDelete
  2. Hi Yoga,

    Sorry, but this is an old post and I'm now trading Futures and not options. (you will find that you ;keep moving on as you learn and grow.) See my Index, and at the
    bottom you will see I'm daytrading /CL Sweet Crude oil futures. The market has been so crazy low volatility for options that I gave up on them for now.

    Bev

    ReplyDelete