Options Strategies in ThinkorSwim - Bull Put Spread Demystified - Analyze Tab, Risk Graph, Risk Profile

This trading tutorial, part of the program “From Zero to Options”, explains the rules to follow carefully when you are about to trade a bull put spread. Before reading, I recommend visiting the tutorial Options Strategies in ThinkorSwim - Price Slices, Stop Losses and Take Profits of a Bull Put Spread.

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, Analyze Tab, there are main points you must analyze to properly trade a bull put spread.

Breakeven point (BEP) - 1^st Downside Protection

In a bull put spread, the breakeven point must be in correspondence, but even better if lower, of a strong support point. This is a fundamental rule, without which this strategy cannot be traded.

You must always consider the breakeven point at the expiration date. That is why it is a short term basis strategy in which your purpose is to hold the position until expiration. In fact, If options are OTM at the expiration date (stock price higher than the two options strikes), your position will expire worthless and you will keep all credit initially received. Of course, you may freely decide to offset your trade at any time and get only a part of such credit.

After setting the breakeven point, you can have it directly showed on the stock chart by clicking on Set Slices to Charts and then on the first square. In this way, and after having done all the other analysis required to trade a bull put spread (have a look at the free trading tutorial How to trade a Bull Put Spread - Technical Analysis and Manual Scan Activity), one can get aware of the distance between the BEP and the current stock price and, consequently, its probability to be profitable at expiration.

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

Cushion - 2^nd Downside Protection

To minimize your risk and keep it under control, you should be able to pick the strikes traded in a way that allow you to set the breakeven point around a 10% lower than the current stock price. For instance, with XYZ traded at $30, a BEP around 27 would be adequate and, all other conditions respected, offer enough protection. The inconvenient of this protection may be a lower potential profit. But this is the price you should pay if you want to trade safely. In any case, the level of cushion depends on how close you are to the expiration date and the level of risk you can manage based on your experience, skills and funding availability.

For further information visit the free trading tutorial How to trade a Bull Put Spread - Time Decay, Risk Profile and Downside Protection.

As we said before, keep in your mind that the breakeven point should be very close to a support point. I strongly recommend beginner to follow strictly the 1^st and the 2^nd protection rules. Instead, experienced traders may choose to make the best balance between them taking additional risks as a change for higher profits.

In fact, finding a very strong support point and selecting wisely the trade entry point so to get into the position around it, you might be able to create a position with breakeven point at a lower level. In such optimal scenario, you may choose to trade with a lower cushion, around 5% for example, and get ready to close your bull put spread as the stock reach such support or slightly less so to give you some rooms. This style allows you to control the risk while trading for higher potential profits. Since it is very demanding psychologically speaking, once again, try to do it only if you are skilled enough.

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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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Implied Volatility (IV)

In a bull put spread, you are building a strategy by selling and buying simultaneously put options. Since the result of this spread is to generate a credit, the option purchased should have a cheaper premium than the one sold so to put in your pocket a positive difference.

At this point, in order to maximize your profit, you should make sure that the IV of the option you sell is higher than the IV of the one you buy. As you want to sell an overpriced option and buy an underpriced option, this rule assures that you are selling something expensive, while buying something cheap.

Earnings Release

Never trade a Bull Put Spread if it is expected an earnings report before the expiration. This is an event that can involve a huge and unpredictable move in the underlying and, consequently, increase dramatically your risk. You can check such events on the website www.earnings.com or directly on the ThinkorSwim Trading Platform.

Probability at Expiration

Set the probability date (prob date) in correspondence of the expiration date of the options traded and check on the risk graph the probability for the underlying to break your BEP within expiration.

To enlarge your probability analysis, you can even go on the section Probability Analysis and check how the price could move at the different expiration dates and in correspondence of different range of price (you must have set before price slices).

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

In the next GroWithYou Trading Tutorial:

• How to scan a Bull Put Spread;
• Scan Tools in ThinkorSwim - Stock Hacker and Spread Hacker;
• Manual Scan Activity - How to pick the best Bull Put Spread.

Keep learning about Options Strategies and ThinkorSwim by going to: Bull Put Spread - Stock Hacker and Spread Hacker in ThinkorSwim and the Manual Scan Activity.

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