How To Manage Bull Put Spreads:
A bull put spread involves selling an out-of-the-money put and buying a further out-of-the-money put.
The sold put provides the income, and the bought put provides the protection in the event of an adverse move in the stock. #OptionsTrading
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A bull put spread involves selling an out-of-the-money put and buying a further out-of-the-money put.
The sold put provides the income, and the bought put provides the protection in the event of an adverse move in the stock. #OptionsTrading
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It is always nice when a trade goes your way, so let's talk about a couple of simple rules for taking profits.
Firstly, if the trade has achieved a profit equal to 50% of the premium received, that can be a great time to take profits and move on to the next opportunity.
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Firstly, if the trade has achieved a profit equal to 50% of the premium received, that can be a great time to take profits and move on to the next opportunity.
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This is particularly true if the profit comes in the first half of the trade.
Taking profits is nice, and winning trades are much easier to manage than losing ones. So, let's review some rules when a bull put spread moves against us.
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Taking profits is nice, and winning trades are much easier to manage than losing ones. So, let's review some rules when a bull put spread moves against us.
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One rule for managing losing trades is not letting the loss get bigger than 1.5 to 2 times the premium received.
This is a good rule for 15-delta bull put spreads but would need to be tweaked slightly for more aggressive spread placements.
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This is a good rule for 15-delta bull put spreads but would need to be tweaked slightly for more aggressive spread placements.
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A second rule to consider is rolling a losing trade out in time to the next expiration. The next expiration could be a weekly or monthly option. The main thing to remember is to only roll for a credit.
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Rolling out in time means tying up precious capital for another week or even a month. So it's essential to receive a net credit for the extra risk being taken.
The final and most important rule for managing bull put spreads?
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The final and most important rule for managing bull put spreads?
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Never let the stock break down through the short put strike. If this happens, the trade becomes very hard to adjust and leaves your account exposed to assignment risk.
Occasionally, we might see a stock make a large gap lower, which breaks through the short strike.
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Occasionally, we might see a stock make a large gap lower, which breaks through the short strike.
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There's not a lot you can do in this situation other than close for a loss. That's where position sizing becomes so crucial.
Even if you take a full loss on the trade, correct position sizing will mean the losing trade won't do too much damage to your overall account.
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Even if you take a full loss on the trade, correct position sizing will mean the losing trade won't do too much damage to your overall account.
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Hopefully, this helps you develop your trading strategy, and if you have any questions, please feel free to reach out.
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