Upping Your Odds with Spreads

Important, Before we get started:
As with any trading strategy, I highly suggest using your platform to paper trade it before you use real money.

This allows you to not only fully understand the strategy, but to work out any kinks with knowing how your platform works, which buttons to push, and so forth.

Now on with the show…

Alright traders, buckle up!

Today we’re diving into the world of spreads — a powerful tool to add to your trading toolbox.

I’ve recently started giving out a free spread trade in my FREE Telegram channel each week.

But I realized that many of you haven’t traded spreads.

And even worse — some folks consider spreads to be scary and hard to do.

That couldn’t be further from the truth. And they help me dramatically raise my odds when I enter a trade.

So today I want to reveal to you the basics of spreads.

Different Strokes For Different Folks

There are many different types of spreads…

But today I want to focus on a bullish beauty called the Bull Put Spread.

The bull put spread lets you collect an instant credit upfront, and you get to keep that full amount of cash as long as the stock price stays above a certain level.

So, how does this bull put spread work?

Let’s say you’ve done your analysis and you believe stock’s price will go up.

But just as an extra way to improve your odds, you want to place a trade that lets you win even if the stock stays flat or goes down a bit.

That’s where the bull put spread comes in.

It lets you be bullish while protecting yourself from potential turbulence.

Here’s the gist:

• You sell a higher strike put option. This puts some cash in your pocket right away.
  
• At the same time, you buy a lower strike put option. This costs some money, but not as much as the money you made selling the higher strike put.

Most platforms will let you place this on a single order. If you’re still learning your platform, look for something called a Vertical or a Put Vertical.

Just make sure you place both the buy and the sell as a single order, because you can put in a “net credit” and the platform will automatically seek out the best way to execute the trade.

When you use the bull put spread, you’re basically creating a range where you can potentially profit.

If the stock price goes up, stays flat or even drops a little by expiration — fantastic!

You keep the “net credit”, which is the cash you earned, and the options expire worthless.

Deciphering Trade Alerts

I just dropped the following trade idea in my FREE Telegram channel.

This week I’m giving it out here on my site, but if you get to get the free trades I give out each week, you’ll need to join me on Telegram.

Let’s break down the individual parts of that alert:

• AVGO is the stock ticker symbol.

• Bull Put Spread, you already know. It’s a strategy that we can use when we’re expecting the stock to go up… But it still allows us to win if the stock goes sideways or even a bit down.

• 1265/1260 are the strike prices for the two put options. We’re selling the higher strike (1265) and buying the lower strike (1260).

• Net credit of .25 or more means you ideally want to make at least $0.25 per share when you execute this trade. This is what you’d enter as the “limit price” when you place the order in your platform.

A Word on Safety – Just In Case

Remember, even with a bullish outlook, there’s always the chance the stock price might move against you.

So it’s always a good idea to have a plan for exiting the trade if the stock price goes lower than you anticipated.

Most platforms allow you to set up alerts triggered by price movements. This way, you can stay informed and decide on the best course of action for your trade if the stock dips below a certain level.

You can even set an order to automatically close the trade if the stock price gets too close to the 1265 put that you sold.

UPDATE: I wrote a whole separate article in planning your exit. Check it out here.

Now Take Action

Alright, that’s the bull put spread in a nutshell!

Remember, this is just one type of spread, and there’s always more to learn. But hopefully, this gives you a good starting point.

If you’re new to spreads or options trading in general, I can’t stress this enough: paper trade it first!

The good news is that most popular platforms these days, including thinkorswim, Schwab, ETrade, TastyWorks, TradeStation, and Interactive Brokers, all offer paper trading options.

This lets you practice these trades without using real money, so you can get comfortable before you risk real cash.

If you’re not sure how to access paper trading on your specific platform, reach out to your broker’s customer support team.

Key Takeaway

Bull put spreads are a great way to be bullish on a stock while upping your odds and limiting your downside risk.

So, if you’re feeling cautiously optimistic, this strategy might be worth exploring further!

Trade well,

Jack Carter