What is the trading plan outlined in this website and how does it work?
How can I participate in the options market with a small amount of capital? How can I mitigate the risk? How can I make an income that may substantially boost or even replace my present income? How can this be accomplished with minimal time investment?
Bull Put Credit Spreads
All of the above questions can be answered using an options strategy called Bull Put Credit Spreads, or BUPS. This strategy uses put options.
Weekly Income; a Constant Income Source
I want a weekly income so I will be doing BUPS credit spreads using weekly options. Most of the 8000+ stocks traded in the market have monthly traded options available and more are adding weekly options on a regular basis.
Some traders like to sell what is called a naked put for income. However that strategy leaves me tremendously exposed to the market. In order to protect themselves and me from that exposure, my broker would require a large margin account which I may not have. To counteract the exposure of selling an XYZ 100 put naked, I will buy an equal number of XYZ 95 puts with the same expiration date, as an insurance policy. The trade looks like this:
Don’t get hung up on the details. This is the meat of the website
On Monday I sell the XYZ 100 put that expires on the coming Friday. I may get $0.70 for it. I would then buy the XYZ 99 put for $0.20. This is my “insurance policy”. This leaves me with a credit to my account of $0.50. The difference in my strike prices, (100-99), equals $1.00. I must have in my account, $1.00 for every share of stock I am trading in this scenario. I want to trade 50 contracts or 5,000 shares, so I need $5,000.00 in my account. This $5,000 is on hold and will not be used in the trade. It would only be in utilized if the trade went bad. I will cover that scenario later in the maintenance section.
With a $0.50 credit per share, my account will be immediately be credited with $2,500. If on Friday XYZ stock is over $100/share, the whole spread expires worthless and I keep the $2,500. Then next Monday, using the same $5,000 account (now $7,500 if I don’t take a withdrawal), I could do this again with the stock my search picks that has the best odds of doing what I want it to do.
If I could do a trade like this every week of the year, I would net $130,000 minus brokerage fees. More than likely I won’t be able to maintain 100% winning trade results. But if I could have a 70% success rate or even 50%, how would that fit into my household income needs? Check out these results:
September 9, 2015 to October 1, 2016, 55 weeks with 42 winning trades or 76% winners
July 5th, 2016 to October 1, 2016. I did 13 trades, 12 winners and 1 loser. That’s 92% winners.
That’s safe, weekly income.
All trades DO NOT turn out as winners but the risk is known when initiating the trade.
If the trade goes against me and XYZ stock goes down, the most I could possibly loose on that trade would be $5,000. However I took in $2,500 when I initiated the trade, so my net loss could not be over $2,500. When a trade goes against us, there are maintenance step which can be taken to lessen the loss or eliminate the loss all together. Sometimes a loss can be turned into a profit on a trade “gone bad”.
Finding Trade Candidates
With the sorting software I use, I create a watch list of stocks trading for $25.00 of more and less than $100 per share, that have weekly options available. I eliminate from that list, stocks that trade less than 500,000 shares per day, guaranteeing plenty of liquidity. I further narrow the search by dumping stocks that are not trading in a 13 week uptrend. In addition to this requirement, I want stocks that their 5 day average price is higher than their 10 day average. This search gives me high volume stocks that are not only going up over the long term but are moving up as recently as this past week.
I have now trimmed a group of 8000+ stocks to a manageable number. At this point I will sort the remaining by several fundamental parameters. I choose the first stock and check the news to make certain there are no upcoming negative events. If clear, that will be my candidate for the week.
Placing The Trade
Going to my online brokerage account which gives me the options chain, I enter the stock symbol, XYZ. The page containing the options chain will populate with the current prices, usually on a 15 minute delay. I would sell the strike price 1 strike below the current stock price and buy the strike price 2 strikes below the current strike price, (called 1st and 2nd strikes out of the money put options). The difference between the two amounts would be the net credit I would receive for the spread. I would want this amount to be $0.25 or better.
I would also check open interest. This means how many contracts are being traded. There should be 100 OI or better. Based on the findings, if I don’t like that trade, I may go to the second stock on my candidate list. All this should take lass than 30 minutes.
Almost done for the week
Once the trade is in place the work is done for the week unless the stock goes down. I can periodically check the price of XYX on my computer, smart phone or telephone my broker. I can also set alerts on my phone to warn me if the stock price goes below the strike price of the put I sold. As long as the price of XYZ is above the strike price of the put option I sold, I’m good. All my work was done on Monday in less than 30 minutes. If it should happen to go down, I may want to do some maintenance.
Maintenance on uncooperative trades
Don’t panic. Even though our goal is to make winning trades; even though we picked the best of the best stocks with the greatest chance of going up in the next 4 days, timing may be such that XYZ may go down. Bear in mind I can never lose more than a specified amount and I know what that amount is before I place the trade. If that amount is more than my risk tolerance can stand, I won’t make the trade. There are 3 things I can do to repair a trade:
1.) Sell the spread and take a loss which should be less than the maximum loss would be.
2.) Buy back the option I sold and keep the other option. I will probably take a loss on the option I sold but if XYZ continues to go down. But the option I chose to keep as insurance should increase in value. I could then sell it sometime before market close on expiration day for a profit offsetting the loss on the option I bought back.
3.) Let it all ride, hoping XYZ turns around and goes back up above the strike price I sold, or just let expiration occur knowing I will suffer the maximum loss. (The least desirable !!)