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Trade Of The Week: Bull Put Spread – WES

September 16, 2020

Trade Of The Week: Bull Put Spread – WES

This week we have selected a bull put spread on WES 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 WES 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 WES for a short term range trade, and plan to close out of the position after the stock hits the 50 Day MA.

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

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

  • The share price has found support around $45 for 6 consecutive days.
  • The stock is trading back within its bollinger band.
  • The stock is trading at the lower end of its recent July to September trading range.

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

When creating this strategy, you want to ensure you are setting the strike prices at strong technical levels. We have chosen a strike of $46.83 for the sold put which is right on the 50 Day MA. 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 low.

For the bought leg we choose a strike price at $43.85 which is on the lower bollinger band. We will buy an American put to protect the American sold put in case of assignment.

Enter LITT Short Strategy:

Sell WES $46.83 15 Oct 2020 Call (A)

Buy WES $43.85 15 Oct 2020 Call (A)

Ratio 1:1

Quantity = 20

Entering into this strategy on 16/9/20 would have generated $3070 of upfront premium in total, before brokerage and ASX fees.

The best outcome (maximum profit) is for WES to expire at (or above) $46.83, which will render the contracts worthless allowing you to keep the upfront premium. The worst outcome is for WES to expire at (or below) $43.85 which is the level at which the protective put sits. The breakeven point for this strategy is at $45.385. All of these outcomes ignore brokerage and ASX fees.

However we will be aiming to hold for only one week to 10 days, or until the stock hits the 50 Day MA. If the market reaches the 50 Day MA or the $46.83 level, we would close 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 performance is not a reliable indicator of future performance.

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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