Dan – I understand the bull put strategy, which provides us $1.10 upside and limits our downside to $3.90 per contract. While the downside is over 3x as great as the upside, the risk makes sense because AAPL is in a uptrend and the 50 ma is strong support. However, would another strategy be to just sell the April 345 puts for $6.80 per contract w/o buying the April 340s? My thought is that my breakeven on the trade would drop to $339.20 vs $343.90 in the bull put spread. While I understand that I would be naked if the stock dropped below $339.20, I could always close the position or short the stock to limit the loss. Also in your comments you mentioned that if AAPl hit the 50 ma again you would load up. Thus, it would seem that if the stock was put to me at $339.20, it would be a good investment. I do understand that this later strategy may require liquidity in the account to be able to purchase the stock as brokers may require assets to be segregated, but assuming that an account has the liquidity sitting in a money market fund, would this strategy make sense?
@Garry- it’s a bold assumption that you’d be able to close the position or short the stock to limit the loss. In the unfortunate circumstance that Steve Jobs succumbs to cancer, the odds are that it would happen after market hours. So, you can’t short or close your position until the market opens. So if you are naked and on the hook at 340 or so, where does the stock open? 240? 200? I don’t know. Call it 240, that’s a 100/share loss for you or $10,000 per contract.
I may not know much, but I do know that recommending that kind of risk taking is pretty much at odds with Dan’s entire Risk Management mantra on OMM and SMM. You’re your own risk management committee, of course, so do what you think is right for you. Just don’t expect that Mr. Market will let you limit your losses easily and cheaply, if the black swan event happens.
Not Dan but as long as you have the liquidity, you would be making more money by selling 1 put versus 1 put spread. Although the margin requirement for bull put spreads is the spread of the puts. So $5 * 100 = $500 per put spread. So the ROI%, assuming the spread expires worthless is $1.1(net credit) / $5 (the spread). = ~20% after commissions.
Where as just selling a put and having the cash to cover the obligation if assigned is about 2% ROI.
Plus, you are managing downside risk so you can sleep better at night.
Thanks Dan. I like the trade, and your explanation of the trade as well as need to sell options when they are expensive was clear and useful. The note about selling on Friday (especially if the markets are closed on the following Monday) to capture time decay over the weekend was beneficial.
Not being as educated as some of you and using thinkorswim I found that I need to enter a “VERTICAL” to get this done. Maybe the dictionary area on “Bull Put Spread” should be expanded to in include “VERTICAL”. Am I correct? I hope…..
Same here Norman, not sure Dan can cover all the different nomenclature of the different brokers, but it would help those who come in new. It thru me for a loop on the first spread, I played with it on the papermoney account until I understood how to enter it.
Norman, you can use the vertical spread button. I find it easier to use the custom button and just enter the trade that you want. On the vertical you have to input the amount of the spread i.e. 1,2,3…5…10 to get the spread you want. Some options trade with strikes every dollar and some every 2.50 and some 5. For us spread challenged you also have to figure out if you are buying or selling the spread. In the custom, you enter the option you are buying and the option you are selling and it it puts the spread together. As in any trade you just have to make sure everything is entered correctly.
Hope this helps
Hi Dan and Team.
I got this fill at Options Express this morning at a 1.10 net credit.
I know this may be early, but can we look at / discuss the technique or mechanism to best use when it is time to exit the trade? Do you close both sides at once, or not … and what indicators do we look at in the mean time?
Hi, late to this one and on a very slow learning curve but if someone can help me with this question. Just went to look at setting this up and i can’t find an April $340 put to buy. Is that possible? Did they run out or am i just doing something wrong? My April’s start at $345.
I got into the trade right now. I did not see any increase in my account balance from doing the spread. Is this normal or do you have to wait until expiration for the funds? thanks for the input in advance.
Dan I really like your method of mentoring us in options. Thanks very much. I also like AUTOTRADE. I bought several PBR options and sold them when they doubled. The PBR options bought through Autotrade look to move much higher, This gives me more flexibility and confidence in my trading. Thanks.
Dan, you mention in the video that an email is coming today on auto trading stops. Is it still coming, or did I not get on the autotrading list? I did the bull spread this morning on TradeMonster using auto trade referencing OMM. The trade worked filled @ credit 1.163. Will the OMM auto trade stops appear automatically on that trade? or will I have to “exit plan” them based on your email. As I read over the tradeMonster auto trading material, I interrupted it to say if I alter any of the auto trade as issued by OMM, it will nullify any new input from OMM on that trade. Is that correct? I assume no automatic stops have be issued, because no ‘exit plan’ information has been entered.
Thanks, learning a lot … mainly that I have a LOT more to learn. I was scared to death at first using AAPL with stock @ 358. x 100 x contracts (my auto trade is set for 10 contracts). Went over the video several times and paper traded it a couple times to see the dollar impact. If I understand the trade we have maximum gain of the initial credit only and a limited down side loss. In other words a known gain on a rising stock, and a known loss as well.
Thanks again,
Chuck
Dan – I understand the bull put strategy, which provides us $1.10 upside and limits our downside to $3.90 per contract. While the downside is over 3x as great as the upside, the risk makes sense because AAPL is in a uptrend and the 50 ma is strong support. However, would another strategy be to just sell the April 345 puts for $6.80 per contract w/o buying the April 340s? My thought is that my breakeven on the trade would drop to $339.20 vs $343.90 in the bull put spread. While I understand that I would be naked if the stock dropped below $339.20, I could always close the position or short the stock to limit the loss. Also in your comments you mentioned that if AAPl hit the 50 ma again you would load up. Thus, it would seem that if the stock was put to me at $339.20, it would be a good investment. I do understand that this later strategy may require liquidity in the account to be able to purchase the stock as brokers may require assets to be segregated, but assuming that an account has the liquidity sitting in a money market fund, would this strategy make sense?
Thanks,
GarryM
@Garry- it’s a bold assumption that you’d be able to close the position or short the stock to limit the loss. In the unfortunate circumstance that Steve Jobs succumbs to cancer, the odds are that it would happen after market hours. So, you can’t short or close your position until the market opens. So if you are naked and on the hook at 340 or so, where does the stock open? 240? 200? I don’t know. Call it 240, that’s a 100/share loss for you or $10,000 per contract.
I may not know much, but I do know that recommending that kind of risk taking is pretty much at odds with Dan’s entire Risk Management mantra on OMM and SMM. You’re your own risk management committee, of course, so do what you think is right for you. Just don’t expect that Mr. Market will let you limit your losses easily and cheaply, if the black swan event happens.
I love this Bull Put Spread on Fridays on a stock that you like. I would like to see more of these. Fiallos
Garry,
Not Dan but as long as you have the liquidity, you would be making more money by selling 1 put versus 1 put spread. Although the margin requirement for bull put spreads is the spread of the puts. So $5 * 100 = $500 per put spread. So the ROI%, assuming the spread expires worthless is $1.1(net credit) / $5 (the spread). = ~20% after commissions.
Where as just selling a put and having the cash to cover the obligation if assigned is about 2% ROI.
Plus, you are managing downside risk so you can sleep better at night.
Hope this helps, if not…oh well.
Nick
Thanks Dan. I like the trade, and your explanation of the trade as well as need to sell options when they are expensive was clear and useful. The note about selling on Friday (especially if the markets are closed on the following Monday) to capture time decay over the weekend was beneficial.
Thanks Nick, though I did not ask the question your explanation made it clearer to me to me
Not being as educated as some of you and using thinkorswim I found that I need to enter a “VERTICAL” to get this done. Maybe the dictionary area on “Bull Put Spread” should be expanded to in include “VERTICAL”. Am I correct? I hope…..
Yes Norman, it is a vertical spread. But you are selling, not buying.
Same here Norman, not sure Dan can cover all the different nomenclature of the different brokers, but it would help those who come in new. It thru me for a loop on the first spread, I played with it on the papermoney account until I understood how to enter it.
Norman, you can use the vertical spread button. I find it easier to use the custom button and just enter the trade that you want. On the vertical you have to input the amount of the spread i.e. 1,2,3…5…10 to get the spread you want. Some options trade with strikes every dollar and some every 2.50 and some 5. For us spread challenged you also have to figure out if you are buying or selling the spread. In the custom, you enter the option you are buying and the option you are selling and it it puts the spread together. As in any trade you just have to make sure everything is entered correctly.
Hope this helps
Hi Dan and Team.
I got this fill at Options Express this morning at a 1.10 net credit.
I know this may be early, but can we look at / discuss the technique or mechanism to best use when it is time to exit the trade? Do you close both sides at once, or not … and what indicators do we look at in the mean time?
Thanks,
RVPilot Tom
Hi, late to this one and on a very slow learning curve but if someone can help me with this question. Just went to look at setting this up and i can’t find an April $340 put to buy. Is that possible? Did they run out or am i just doing something wrong? My April’s start at $345.
thanks
Ken
Make sure you are viewing all not just near the money strike prices-good luck
thank you! (or in other words “my god, i’m such an idiot”)
I got into the trade right now. I did not see any increase in my account balance from doing the spread. Is this normal or do you have to wait until expiration for the funds? thanks for the input in advance.
Dan I really like your method of mentoring us in options. Thanks very much. I also like AUTOTRADE. I bought several PBR options and sold them when they doubled. The PBR options bought through Autotrade look to move much higher, This gives me more flexibility and confidence in my trading. Thanks.
Dan, you mention in the video that an email is coming today on auto trading stops. Is it still coming, or did I not get on the autotrading list? I did the bull spread this morning on TradeMonster using auto trade referencing OMM. The trade worked filled @ credit 1.163. Will the OMM auto trade stops appear automatically on that trade? or will I have to “exit plan” them based on your email. As I read over the tradeMonster auto trading material, I interrupted it to say if I alter any of the auto trade as issued by OMM, it will nullify any new input from OMM on that trade. Is that correct? I assume no automatic stops have be issued, because no ‘exit plan’ information has been entered.
Thanks, learning a lot … mainly that I have a LOT more to learn. I was scared to death at first using AAPL with stock @ 358. x 100 x contracts (my auto trade is set for 10 contracts). Went over the video several times and paper traded it a couple times to see the dollar impact. If I understand the trade we have maximum gain of the initial credit only and a limited down side loss. In other words a known gain on a rising stock, and a known loss as well.
Thanks again,
Chuck
Dan what do you think of just reversing this into a bull call spread, buying the 340, selling the 345?