How to make profit on Bull Put spread (Credit Spread)? Steps

Bull Put Spread.

The Condition to get the trade right for Bull Put Spread:-

1. high Volatility - mean the option premium is expensive but this will happen on the SOLD LEG (short PUT), just remember the higher the stock Volatility the better it is. (please do a comparing to other stock or set a value for it.) Hint: higher beta in stock.

2. high Delta - The higher the Delta the better it is, why? so this will make the option premium expensive. the best is get near to 1 in delta value but most of the time is under 1 something like 0.8 etc.

3. more open interest - the more the better, why? this will make the option more easily to trade on ether buy or sell the option, because the liquidity is there.

4. Trade the Bull Put spread while the STOCK PRICE are nearest to SOLD LEG strike price, like example the strike price is 120, the stock price is 119.95 to 119.98 - This will help you to get maximum credit as possible as. (make sure is out of money option)

5. To trade the bull put spread after market opening 5 to 10 min., this is because once you choose the stock that you going to trade the price of premium will tend to move around.

Key point to know For this case:-

- When is company's Earning Announcement DATE, AAPL is 07/25/2007

-AAPL is bull for future earning on ipod sale, new ipod phone sale and as well as new coming future product that welcome the consumer market.

-This trade is done on 6/27/2007 which mean must have min. more than one month before Expiration.

- Breakeven is:-
(Higher strike price - Maximum Credit at Expiration Per contract)

$120 - $2.05 = $117.95

Therefore the breakeven is $117.95

- Maximum Credit at Expiration is:-

(higher strike price premium X no. of contract X 100) - (Lower strike price premium X no. of contract X 100)

($4.60 X 2 X 100) - ($2.55 X 2 X 100) = $410

Therefore is $410 (Maximum Credit at Expiration)

- Maximum Loss at Expiration is:-
[ ( Upper Strike Price - Lower Strike Price) X number of contract X 100 ] - Max. at Credit
[ ( $120 - $115 ) X 2 X 100 ] - $410 = $590

Therefore is $590 (Maximum Loss at Expiration)

NOTE: (- Credit is Reward, - Loss is Risk.)

Bull Put Spread unlike the straight Put that needed to go for cheap premium to have maximum leverage.

The Best is YOU must record on what you are trading on, that will help you to learn more and understand more on option trading. because there is too much things to know.

WARNING! Please take note Before you trade, please do your fundamental analysis, this article is just only a guide to help you get the trade right by 40%, the rest is economy data, fundamental analysis, market sentiment, insider trading and other more..etc.

Spread Trade Risk Disclosure:-

Before using our spread and combination one-step trading screens, options spread traders must understand the additional risks associated with this type of trading.

While it is generally accepted that spread trading may reduce the risk of loss of the trading of the outright purchase of a standardized option contract, an investor/trader MUST understand that the risk reduction can lead to other risks.

1. Early exercise and assignment can create risk and loss. Spreads are subject to early exercise or assignment that can remove the very protection that the investor/trader sought. This can lead to margin calls and greater losses than anticipated when the trade was entered.

2. Execution of spread orders is "not held" and discretionary. Spreads are not a standardized contracts as are exchanged traded put and calls. Spreads are the combination of standardized put and call contracts. There is NO spread market in securities that are subject such benchmarks such as "time and sales" or "NBBO" (National Best Bid/Offer) and therefore the "market" cannot be "held" to a price.

3. Spreads are executed differently than "legged" orders. Spreads are used by strategists as examples of risk protection, profit enhancement and as a basis for results and return on investments. However, these strategies ASSUME that the trade can actually be executed as a spread when market forces may and can make the actual execution impossible. Spreads are a bona-fide trades and not "legged" or "paired" of individual separate trades. For example: options prices on cross-markets are misleading for the spread trader. An option may be offered on one exchange and bided on another exchange that can lead the trader to believe that their spread trade should be filed, when, in fact, the bids and offers must be on the SAME exchange. As all bona-fide spreads are routed and executed on "one" exchange.

4. Spreads are entered on a single exchange and are acted upon by a market maker. Spreads are executed at the discretion of a market maker and when cancelled or filled require that the market maker take manual action and require manual reporting at times. Delays for reporting of fills and cancels may create additional risks in fast or changing markets. Spreads entered through optionsXpress one step spread screens are ALWAYS entered as spreads and as such are subject to the market risk and conditions as explained above.

For more information on the characteristics and risks of standardized options, please visit our Risk Disclosure page.