Sell Insurance, Buy Insurance and keep the change?
This is an options strategy known as trading a ‘Credit Put Spread’ and is the first strategy I ever did. As you know you can buy or sell a call or a put. This strategy uses the art of selling a put (for income) and buying a put (for protection). The structure of the deal means you would receive more income from selling the put that you would pay out for buying the put as protection. This strategy is placed on the premise your view of the stock is bullish (Stock is going up).
This strategy may seem complicated at first but once you can understanding the mechanics of options trading then eventually things will click.
I don’t want to go into detail with this post but merely want to highlight just another strategy that can take options to the next level. The strategy is sometimes referred to as the ‘Bull Put Spread’ because the expectation is for the stock to go up but personally I think this can be a bit of a misnomer, and this is why:
A “Bull Put Spread’ is denoting the trade as bullish and more importantly a direction trade. However the best thing about this strategy is that the stock can stay at the same level or even go down a bit and still have a successfully trade, and because of this the trade has an 80% chance of winning. Selling a put ‘Out The Money’ will usually mean selling a put slightly below the current price. Your obligation to provide stock to the market will only become a reality if the stock was to finish below the sold put strike price on expirey. So really the stock can 1) go up a bit, 2) go up a lot, 3) stay the same, 4) go down a bit or 5) go down a lot. It is only if the stock goes down a lot the trade will fail. Which is where the 20% of the trade failing comes from.
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