The October Consumer Price Index (CPI) reading came in lower than expected at 7.7% and the stock market rallied on 10 Nov 2022.
I initiated a BULL PUT Spread aka PUT Credit Spread (3 contracts with a max loss of USD165 and max gain of USD1,335) on Apple stock.
Details are as follows:
I opened the positions when Apple was trading at USD143 and the contracts expire in about a week’s time. I wasn’t expecting Apple to close above USD155 for my max profits as there is a high chance that they may expire worthless (if Apple closes below USD150).
My intent is to capture the upside in share price over the next few days so that I can close the contracts at a profit. In the worst case where Apple’s share price drops instead of rises, my max loss is only capped at USD 165 and existing early may mean I lose less than that amount.
Over the next few days, the share price eventually rose to $148 and I closed the contracts with a profit of USD645, which is 390.91%, assuming my max loss of USD165 is my invested capital.
To learn more about how vertical spreads work, in particular, the BULL PUT Spread that can allow you to trade with a small account, do refer to these articles:
Vertical Spreads Options Strategies Explained For Newbies | A Simple Way To Understand And Remember Vertical Spreads
How Does Bull PUT Spread Work? | PUT Credit Spread Explained For Newbies (Part 2 of 4)
Points To Note
I am not sure about other brokerages but for the Interactive Brokers brokerage that I am using, I will need to upgrade from a cash account to a margins account to initiate vertical spreads contracts. That does not mean that I am using it to trade vertical spreads options. The margins are there in case there is not enough cash in the account if one of the legs is assigned early (which usually is rare) or the share price is in between the 2 legs upon expiry. That would mean that one contract expires In-The-Money (ITM) while another contract expires Out-Of-The-Money (OTM). When this happens, it is not a big risk as the spread will always have a max loss worked out, the options contract buyer just needs to manually activate the other leg to work things out.
However, to prevent such situations from happening, it is better to close the contracts before the expiry date if the share price is hovering around the strike prices of the vertical spreads contracts, or simply let the contracts expire out of the money if the share price is far from the strike prices of the two legs.
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