Options Strategies in ThinkorSwim - Price Slices, Stop Losses and Take Profits of a Bull Put Spread

This trading tutorial, part of the program “From Zero to Options”, explains the main features available in the Analyze Tab to properly trade a bull put spread. In the Analyze Tab, the risk profile of a bull put spread is analyzed through risk graphs that allow verifying the feasibility of a position in terms of potential/maximum profit, maximum loss, breakeven points and so on.

How to place the most rewarding options strategies from scratch? Visit my website at www.FromZeroToOptions.com to get tutorials, instructions, articles and much more stocks and options related.

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In the ThinkorSwim Trading Platform, in orderto analyze the risk profile of a bull put spread, you should be aware of the following points in the Analyze Tab: price slices, position parameters, breakeven points (BEPs), implied volatility (IV), earnings release, cushion (downside protection) and probability analysis.

If you find this tutorial interesting, read also the free trading tutorials: Analyze TAB and Options Risk Profile and Risk Graph Analysis.

In the Analyze Tab, go straight to the Risk Profile section. Down below the risk graph, you find two additional sections called Price Slices and Positions and Simulated Trades.

Price Slices - How to Set Stop Loss and Take Profit

The Price Slices section allows setting different levels of price and visualizing them straight on your risk graph as to check how your bull put spread is affected by any dollar change in the stock price. You should set price slices at different price levels and check the corresponding profit/loss and greeks.

When trading a bull put spread, it is common setting a price slice at the breakeven point (BEP) at expiration. Sure enough, this is absolutely correct, but, unfortunately, in this point the loss one could experience may be higher than the maximum loss actually affordable. For this reason, I have got the habit to set an additional slice at the stock price in correspondence of which, looking at the risk graph, my loss is equal to 20% of my investment (in any case this may match the BEP). This slice is the maximum loss I want to face and, consequently, identifies my stop loss. Moreover, I recommend setting a price slice in correspondence of the strong support point that was one of the main reasons why I got into the trade. Once again, this price level may correspond to the BEP or to the second slice set. If not, setting this third slice is very important. In fact, when the underlying breaks such point, it is a clear sign that one position has failed and, as a consequence, it should be better closing the trade. This point becomes now your new stop loss which, being tighter than the other ones, allows you to reduce your loss. I think this is absolutely great news!

Once set price slices, analyze carefully greeks and profit/loss levels for each scenario and write down your trading plan. You should always be able to decide anything related to your trade in advance.

Free Tutorials - Stocks, Options and ThinkorSwim. Click Here.

Furthermore, I usually set an additional slice at the stock price in correspondence of which, looking at the risk graph, my profit is equal to 50% of the credit received if the stock moves up quickly (approximately in one week). This slice represents the reward I would like to get from my position in one week’s time and identify my take profit. After the first week, one may decide to set this slice at a higher level like for example 70% or 80% of the whole credit. As a rule of thumb, remember never to set your take profit higher than the 80%, because it usually takes a long time for a bull put spread to get the remaining 20%. In fact, after reaching such 80% of rewarding the stock could retrace resulting in a too high risk to lose a huge part of your profit.

Using price slices wisely, traders should be able to analyze greeks and profit/loss levels both analytically and on the risk graph for any of the prices considered. It is important to perform such simulations because it allows one to get prepared knowing exactly what to do as the stock fluctuates.

For further information, visit the free trading tutorial Setting Price Slices on Risk Graphs and Stock Charts.

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Do not forget to visit my website at www.FromZeroToOptions.com to get tutorials, instructions, articles and much more stocks and options related.

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Positions and Simulated Trades

In the section Positions and Simulated Trades, below the section Price Slice in the Analyze Tab, you can check the feasibility of your bull put spread by modifying parameters such as stock price, implied volatility (IV), time (small calendar on the top), etc.

Here, you can make further simulations by changing parameters singularly or together and verify straight the impact on your position.

For instance, you can:

Simulating a movement up or down in the stock price; one can make sure of how any movement in the stock price affects his bull put spread in terms of profit/loss and greeks. This helps you to decide in advance when might be convenient get out from the position in order to either minimize a loss or to lock in a profit.

Simulating on your bull put spread an increment or decrement in IV; one can get aware of its impact on the profit/loss value and on greeks for each given price. Keep in mind that a bull put spread is traded on a short term basis and is not a volatile strategy. Consequently, the impact of IV on it is minimal.

Simulating the passage of time by going on with the days into the calendar; one can get aware of how time decay affects positively a bull put spread when it is profitable and negatively when it is unprofitable. In fact, when your position is above the breakeven point, the passage of time is in your favor; whilst when the breakeven point is broken, the passage of time becomes harmful to your position.

To analyze additional information about the bull put spread feasibility visit the free trading tutorial Options Strategies in ThinkorSwim - Bull Put Spread Demystified - Analyze Tab, Risk Graph, Risk Profile.

Free Tutorials - Stocks, Options and ThinkorSwim. Click Here.

In the next GroWithYou Trading Tutorial:

• Bull Put Spread feasibility in ThinkorSwim;
• Breakeven point (BEP);
• Implied Volatility (IV);
• Earnings release;
• Cushion (downside protection);
• Trade Probability.

Keep learning about Options Strategies and ThinkorSwim by going to: Options Strategies in ThinkorSwim - Bull Put Spread Demystified - Analyze Tab, Risk Graph, Risk Profile.

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