News

Trade Of The Week: Bull Put Spread – TLS

October 6, 2021

Trade Of The Week: Bull Put Spread – TLS

This week we have selected a bull put spread on TLS 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 TLS 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.

We have chosen TLS for a short term range trade, expecting it to bounce off the 50 DMA ($3.89) and plan to close out of the position after the stock hits the $4.00 level again.

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

We have selected TLS as a range trade for the following reasons:

  • The share price has found support at the 50 DMA ($3.89)
  • The stock has recently tested the $4.00 level and could quickly bounce back.
  • The stock has been trading above the 50 DMA since March 2021.

TLS has good market maker coverage which means the spreads will be smaller. However being a low value stock, the ASX fees may be relatively more expensive.

Source: Implied Volatility

When creating this strategy, you want to ensure you are setting the strike prices near strong technical levels. We have chosen a strike of $3.97 for the sold put which is just below the current resistance level. We have chosen an American option so there is some risk of early assignment, however this is a short term trade (holding period of 1 week to 10 days), and with a month to expiry and no upcoming dividends the likelihood of assignment over the next week is relatively low.

For the bought leg we choose a strike price at $3.77. We will buy an American put to protect the American sold put in case of assignment.

Source: Implied Volatility

Entering into this strategy on 5/10/21 would generate $2520 of upfront premium in total, before brokerage and ASX fees.

The best outcome (maximum profit) is for TLS to expire at (or above) $3.97 which will render the contracts worthless, allowing you to keep the upfront premium. The worst outcome is for TLS to expire at (or below) $3.77 which is the level at which the protective put sits. The breakeven point for this strategy is at $3.88. All of these outcomes ignore brokerage and ASX fees.

We will be aiming to hold for only one week to 10 days, and will close if the stock hits the $4.00 level.

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 (03) 8080 5795.

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 consider our Financial Services Guide (FSG) including the Privacy Statement and any relevant Product Disclosure Statement or Prospectus (if one is available) to understand the features, risks and returns associated with the investment.

Please click here to read our full warning.

From 5 October 2021, under Design and Distribution Obligations, anyone opening a trading account will be required to meet the Target Market Determination criteria of Phillip Capital and subject to an assessment the results of which will determine your eligibility for a trading account, for further information please click here.

Any advice provided by Reach Markets including on its website and by its representatives is general advice only and does not consider your objectives, financial situation or needs, and you should consider whether it is appropriate for you. This might mean that you need to seek personal advice from a representative authorised to provide personal advice.

 

 


General Advice Warning

Any advice provided by Reach Markets including on its website and by its representatives is general advice only and does not consider your objectives, financial situation or needs, and you should consider whether it is appropriate for you. This might mean that you need to seek personal advice from a representative authorised to provide personal advice. If you are thinking about acquiring a financial product, you should consider our Financial Services Guide (FSG) including the Privacy Statement and any relevant Product Disclosure Statement or Prospectus (if one is available) to understand the features, risks and returns associated with the investment.

Please click here to read our full warning.

Live Investor Briefing

Learn how regenerative farming is transforming the agriculture industry

Leave a comment