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Trade Of The Week: Bull Put Spread on XJO

December 23, 2020

Trade Of The Week: Bull Put Spread on XJO

The S&P/ASX 200 Index has been trading around the 6500-6700 range since the 17th of November. The market had pulled back for 3 consecutive days but has today opened and traded higher.

The S&P/ASX 200 Index has been trading around the 6500-6700 range since the 17th of November. The market had pulled back for 3 consecutive days but has today opened and traded higher.

Source: Implied Volatility

We expect this market move to be a short term bounce off the technical support at 6600 (around 3-5 days). A similar market move occurred between the 25th of November and 1st of December 2020, and again between the 9th and 15th of December 2020. The resistance has risen slightly after each of these bounces.

We expect resistance at the 6700 to 6750 levels once again, and if the market rises quickly we can close out of the position, ideally within 3 days, to take the profits.

To profit from a rising market, we can enter into a Bull Put Spread position.

We will select a Bull Put Spread as we expect IV to fall slightly as the market rises over the short term.

This strategy is a credit spread. You will receive an upfront premium for entering into the position. The goal is for the position to expire worthless so you can keep this upfront premium, or for the value of the options to fall quickly so you can close the position at a lower price than what you received to open it.

Being a bullish trade, the position will increase in value as the market rises.

Being theta positive, time decay will work in your favour. This will allow you to hold the position for longer in case the market moves slower than expected.

 

Enter bull put spread:

Sell XJO 6700 21 Jan 21 Put (E)

Buy XJO 6500 21 Jan 21 Put (E)

 

We set the strike of the sold leg at 6700 which is the first resistance level. If the market pushes through this level and trades close to 6750 we will close out the position.

We set the bought leg at 6500 which is a major support level. If the market were to fall this low and break through, there could be a large sell-off if the market panics.

If you would like some more information on options trading strategies, call 1300 805 795.

 

You can also follow this link for a detailed tour of the Implied Volatility platform.  

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 (03) 8080 5795. Please note, we provide General Advice only. 

Past performance is not a reliable indicator of future performance. The opinions expressed in this article are our personal views. 

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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