How does a Bull Put Spread work?Bull Put Spreads combine safety with large profits (5%, 10%, or more monthly). Want to know how it works? Okay, I'm going to tell you, Bull Put Spreads is buying a put option on a bullish stock and selling a put option on a bullish stock. Let's look at stock PCP it is at $53.6 and the support is at $52.9. We believe it will up to resistance around 57, or 58. We can buy the stock or a Call and sell it if it goes up. Some of you may think this is too risky. You want security? You want to make money even if the stock doesn't go up?
The answer, a Bull Put Spread. This involves not using Calls but Puts as well. I know your thinking, "Puts are how you make money when a stock trends down, we think this stock will go up are you crazy?" Let me explain. Say, we find that the $50 Put is trading for $1.60 and the $45 Put is trading for $.80. What if you buy the $45 Put $.80 and sell the $50 Put for $1.60. You just made $.80. Now hold on, there are some rules. Let's think what do we have to do to if we are wrong. What if the stock dropped below $50? We could be forced to buy the stock at $50 and sell it at $45 (losing $5(we lost) -$.80(we made)= -$4.2). Knowing this, why would anyone want to risk $4.2 to make $.80? One reason the percentage of success is so high. Remember this formula. (average winnings)*(% won)-(average loss)*(% loss)= profit. If we are right 90% of the time than (.80)*(.90)-(4.2)*(.10)= $.30. Now the reason we have such a high probability of success is, because we don't really care what direction the stock is going. If it goes up to $58 that's great, if it stays at the same price that's great too. We still make money (as long as it stays above $50 by the time the options expire). Wait, wait, were not done yet. This is very important! What if your stock goes down can you still profit? Probably and here is how. Let's say the day after we do a credit spread on PCP breaks out. It goes down to $50 (way past support). What can we do? Well let's think, what do we own? Puts, how do they make money when a stock goes down. What if we buy back the $50 Put for $3.00. Now we just own a $45 Put on a stock that is going down, this is great. Now the stock continues it's down trend and we eventually sell the $45 Put for $2.4. Let's look at the money. Let me Show You The Money
Bull Put Spread + $80 buy back $50 Put -$3.00 sell $45 Put +2.40 = total +$.60
We made $.60 (12%) on this trade and we were dead wrong! Don't you just love the stock market!
 
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