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Trade Of The Week: Bull Put Spread – BHP

September 8, 2020

Trade Of The Week: Bull Put Spread – BHP

This week we have selected a bull put spread on BHP as the trade of the week. This trade is a bullish credit spread, where you receive upfront premium for entering the position and the best outcome is for it to expire worthless, so you can keep the upfront premium.

This week we have selected a bull put spread on BHP as the trade of the week. This trade is a bullish credit spread, where you receive upfront premium for entering the position and the best outcome is for it to expire worthless, so you can keep the upfront premium.

Setting up the trade involves selling an in-the-money Put (for upfront premium) and buying an at-the-money put (as protection).

I have selected BHP for the following reasons:

  • The share price has bounced off the 200 Day MA.
  • Iron ore futures are trending upward
  • Economic slowdowns worldwide means we can expect more fiscal stimulus and large scale infrastructure projects, increasing demand for iron ore.
  • The stock has bounced off the lower end of its bollinger band.

 

BHP has good market maker coverage which means the spreads will be smaller.

When creating this strategy, we want to ensure we are setting the strike prices at strong technical levels. I have chosen a strike of $39.01 for the sold put which gives the stock a comfortable amount of space as it approaches the $40.00 resistance. I have chosen a European option so there is no risk of early assignment, and it currently has a larger open interest.

For the bought leg I will choose a strike price at $37.00 which has been a support and resistance level over July and August 2020. I will hold an American put as the price difference is negligible and it has a much larger open interest.

Enter LITT Short Strategy:

Sell BHP $39.01 15 Oct 2020 Call (E)

Buy BHP $37.00 15 Oct 2020 Call (A)

 

Ratio 1:1

Quantity = 35

 

Entering into this strategy on 8/9/20 would have generated $3867 of upfront premium in total, before brokerage and ASX fees.

The best outcome (maximum profit) is for BHP to expire at (or above) $39.01, which will render the contracts worthless allowing you to keep the upfront premium. The worst outcome is for BHP to expire at (or below) $37.00 which is the level at which the protective put sits. The breakeven point for this strategy is at $37.905. All of these outcomes ignore brokerage and ASX fees.

If the market reaches the $39.01 level early, or continues to push towards $40.00, you may consider closing the position early to lock in the profits.

If you would like some more information on options trading strategies, call 1300 805 795. Please note we provide General Advice only. 

 

To try trading for yourself using the most powerful Options Trading technology in Australia, click here for a trial for our Implied Volatility platform.

We wish you good luck with your trading, and as always if you have any questions, please feel free to contact our trading desk on 1300 805 795 .

 

Past returns do not reflect future returns. 

Trading options is not suitable for everyone. There is a risk that you can lose more than the value of a trade or its underlying assets. You should only trade if you are confident that you fully understand what you are doing. If you are thinking about acquiring a financial product, you should consult our Financial Services Guide (FSG) at www.reachmarkets.com.au first. 

 


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