The stock market had a huge bounce on Tuesday following signs the US and Iran are seeking to end the war, and if that continues, bull put spread trades could do well.
To execute a bull put spread, an investor would sell a naked put and then buy a further out-of-the-money put to create a spread.
A bull put spread is considered less risky than a naked put, because the losses are capped thanks to the bought put.
The following trades are short-term and high risk, so should only be considered by experienced option traders.
AAPL Bull Put Spread Example
Apple (AAPL) is showing strength and bounced off the 200-day moving average on Tuesday.
Apple is rated as a Strong Buy according to 22 Analysts, with 3 Moderate Buy ratings, 16 Hold ratings and 1 Strong Sell rating.
Selling the April 17 put with a strike price of $245 and buying the $240 put would create a bull put spread.
This spread was trading for around $0.75 yesterday. That means a trader selling this spread would receive $75 in option premium and would have a maximum risk of $425.
That represents a 17.65% return on risk between now and April 17 if AAPL stock remains above $245.
If AAPL stock closes below $240 on the expiration date the trade loses the full $425.
The breakeven point for the bull put spread is $244.25 which is calculated as $245 less the $0.75 option premium per contract.
In terms of a stop loss, if the stock dropped below $245, I would consider closing early for a loss.
GOOGL Bull Put Spread Example
Alphabet (GOOGL) stock also had a fantastic day on Tuesday, rising 5.14% and closing near the high of the day.
Alphabet is rated as a Strong Buy according to 47 Analysts, with 3 Moderate Buy ratings and 5 Hold ratings.
Selling the April 17 put with a strike price of $270 and buying the $270 put would create a bull put spread.
This spread was trading for around $0.77 yesterday. That means a trader selling this spread would receive $77 in option premium and would have a maximum risk of $423.
That represents an 18.20% return on risk between now and April 17 if GOOGL stock remains above $175.
If GOOGL closes below $270 on the expiration date the trade loses the full $423.
The breakeven point for the bull put spread is $274.23 which is calculated as $275 less the $0.77 option premium per contract.
In terms of a stop loss, if the stock dropped below $275, I would consider closing early for a loss.
HOOD Bull Put Spread Example
Robinhood Markets (HOOD) has struggled in recent months, but unusual option activity on Tuesday could be signaling the stock is near a bottom.
Robinhood is rated as a Strong Buy according to 16 Analysts, with 2 Moderate Buy ratings, 4 Hold ratings and 1 Strong Sell rating.
Selling the April 17 put with a strike price of $63 and buying the $55 put would create a bull put spread.
This spread was trading for around $1.13 yesterday. That means a trader selling this spread would receive $113 in option premium and would have a maximum risk of $687.
That represents a 16.45% return on risk between now and April 17 if HOOD stock remains above $63.
If HOOD closes below $55 on the expiration date the trade loses the full $687.
The breakeven point for the bull put spread is $61.87 which is calculated as $63 less the $1.13 option premium per contract.
In terms of a stop loss, if the stock dropped below $65, I would consider closing early for a loss.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
