If you want to line up big profits, create income, and keep risk low in 2020, you’re going to need a goal-specific trading tactic to get results.
Today, we’re going to talk about a trading tactic that you’re going to love every bit as much as I do when you understand how, when, and why to use it.
Moreover, you’ll also understand which stocks are perfectly suited to help you build life-changing wealth.
You’ll want to master this technique for three reasons, especially now, as we head into elections and volatility picks up:
- You don’t have to have a lot of money to make serious money.
- You can rack up wins consistently when other investment techniques fail.
- You can keep risks low – to razor-thin levels actually.
Best of all, it takes only a few minutes of your day to really see results…
Your One-Stop Shop for Power Trading Profits
It doesn’t matter whether you’re looking for growth, income, or some combination of the two. Getting there in today’s markets will require new knowledge.
Knowledge that centers around what I call the five profit pillars:
- Trade regularly to maximize winning potential: This trading method can produce significant results that often top win rates of 85% to 90% when used consistently even in conditions that cause traditional methods to break down or fail completely.
- Limit risk: Many investors and traders swing for the fences without realizing the amount of risk they’re taking. This trade limits that… to the penny… before you make your move. That means you’re never going to risk blowing up your account by mistake.
- Stay in the game: Many traders make the mistake of trying something once, then moving on if they don’t get the results they want. This trade is like fuel for your wallet, in that you’ll want to use it regularly because it can win consistently, in all sorts of economic conditions, over long periods of time.
- Recognize that the markets have a very pronounced upside bias over time: The headlines, the trade wars, the election… those are all short-term influences at best. So, you want to constantly play to the upside even if you “feel” like the world is coming unglued.
- Be strategic: This trading tactic is perfectly suited for investors who want a little more growth, higher income, or even the best of both worlds. Young or old, starting out or seasoned veteran investor, it doesn’t matter, especially if you use it to complement an existing portfolio of conventional investments, even if you have a limited amount of money.
The bullish put spread (also called a “credit put spread”) is a limited risk, yet a very powerful option trade capable of producing profits regularly, in all sorts of market conditions.
As the name implies, it’s a “spread” – meaning there are two different options involved. Don’t let that term put you off if you’ve never seen it before. A spread is simply Wall Street speak for something like a “value meal” at your favorite fast food joint, in that you get more than one item for less money at the same time.
You use bullish put spreads when you expect the stocks that interest you to be neutral or to move higher.
The “spread” consists of two options – in this case, put options – that have the same expiration date but at different strikes. And in this case, you put them on – meaning you establish the trade for a credit.
That means you’re getting paid to trade as opposed to paying to trade. We’ll come back to that in a moment with an example that’ll help you sort all this out.
First, though, maximum profits are limited to the net credit received less any commissions paid, but – and this is really important – the risks are also limited. I like that a lot, especially at the moment when the markets are trading at or near new highs and many folks are worried about a correction, a downturn, or China pulling another fast one as we head into elections.
The Bullish Put Spread in Action
Apple Inc. (NASDAQ: AAPL) is trading down $5 as I type this, but I still think it’ll hit $300 a share by year’s end, in keeping with a forecast I made in January of this year.
This trade – the bullish put spread – is an ideal way to play the opening and use the short-term sell-off to your advantage while also generating some quick profits.
I suggest looking in the $240 to $245 area, an area of key support where there’s a bunch of options activity, so you know the professionals are doing the same thing.
You’d simultaneously sell 1 AAPL Dec. 20, 2019 $245 put (AAPL191220P00245000) and buy another 1 AAPL Dec. 20, 2019 $240 put (AAPL191220P00240000) for a net credit of $0.50, or $50 per contract (in this example: $1.90 − $1.40 = $0.50).
These numbers are smaller than they would be otherwise, but I don’t believe in cherry picking. I’ve deliberately chosen this example at a time when the markets are running higher so that I can show you it works even when many traders wouldn’t think it would.
The profit and loss diagram is very simple to understand, something else I like a lot.
If Apple’s stock price is at or above $245 by Dec. 20, 2019, when these options expire, you’ll have captured 100% of the possible profit.
Some people calculate returns on the total amount of capital held in reserve, but that’s splitting hairs to my way of thinking. But just in case you’re interested, that’s a return of 10% in under 30 days, or 121.66% annualized.
Could Apple stock drop further?
Yes, that’s always a possibility – and a fair question with a great answer.
If you buy 100 shares of AAPL stock, you’re spending $26,230 at current prices. But this trade only requires $500, which is calculated by taking the difference between the strike prices and the credit received, less commissions ($245 − $240 = $5).
The most you can lose if this trade blows up completely and Apple’s stock tanks is $500, versus $26,230 or your entire enchilada if you buy 100 shares of Apple. That, to return to the graphic above, would be when the price is at or below $240 at expiration. It’s worth noting, though, that you’ll keep all of the initial premium you received, meaning you actually have only $450 at risk plus any commissions (which, given the recent race to zero by brokerage firms, may not exist at all).
Are there caveats?
- Heroes or Zeros: The bullish put spread works because of a combination of time decay and price movement, meaning that the price changes rapidly as expiration approaches and volatility increases. However, win rates can and do approach 80% or more even if the markets go against you, assuming you pick strike prices properly. But, like any trade or investment, it can lose.
- Early Assignment: Options traded in the United States are subject to something called early assignment, meaning that anybody who’s sold an option short will have no control over when he or she has to fulfill that obligation. Generally, this is a function of dividends and prices being below one or both strike prices – again, it’s something that rarely happens if you’ve picked your strikes properly. Thankfully, this isn’t a big deal, and it sounds a whole lot scarier than it actually is because you can close the spread to eliminate the risk of assignment.
In closing, I hear from a lot of investors and traders alike who think they can’t do something like this.
The beauty of a trade like this one – the bullish put spread – is that anybody can do it with a little practice. Young or old, newbie or seasoned veteran, it doesn’t matter. Even if you don’t have a lot of money to start with.
— Keith Fitz-Gerald
Source: Money Morning