Bull Put Credit Spread Trade ($UVXY)

The major indexes continue to hit fresh all-time highs as the calendar flips into the last month of 2017.  The combination of robust earnings, the potential for a new tax plan, and bullish sentiment have kept stock prices elevated and has weighed on implied volatility.  In fact, S&P 500 volatility is near 52-week lows moving into December.  As traders continue to climb a wall of worry, betting that S&P 500 index implied volatility will stabilize using a bull put credit spread, is a prudent way to generate revenue.

You can now easily scan for option spreads using Option Samurai. Our new scan results allow you to find the best possible vertical credit spreads along with straddles and Iron Condors.  Just as a refresher, a vertical option spread strategy is one where you purchase and sell two alike options (either 2-puts or 2-calls) simultaneously, that have the same expiration date. The only difference between the options will be the strike price and the premium. A vertical option that is a credit spread allows the seller of the spread to receive a credit, which means the premium of the option you sell is higher than the premium of the option you purchase.

When you look to sell a bull put credit spread, you are not betting that a stock or ETF will move higher, you are in fact speculating that the stock or ETF will not drop through a specific price before the expiration date. The price level you want to avoid is the sold put price, but even if the underlying stock declines below this level you can still make money.

Running an Option Samurai Scan

There are several criteria that are key to finding a robust Bull Put Credit Spread

Bull Put Scan
Bull Put Scan

The $UVXY ETF is a volatility ETF that looks to track the changes of the VIX volatility index, which is equivalent to the implied volatility of the at the money strike prices for the S&P 500 index.  The ETF price is attempting to form a bottom despite stock prices surging to fresh highs.

The Option Samurai Scan can include any symbol, and in the case of a volatility ETF you don’t have to wait until an earnings release. You also want to make sure that the implied volatility that is priced into the vertical spread is at least above the lower quartile of its historical range. You can do this by making the implied volatility range in between 25% and 100%.

The spread profit describes the amount of profit you would receive if you executed 1-contract of a UVXY bull put credit spread, and both options expired worthless.  You can construct this by using the spread profit above a specific level.  The spread profit of $59 means that the price of the sold put (in this case the $13 put) minus the price of the purchased put (in this case $11.50) is $0.59.

Since the strike spread ($13.00 – $11.50) equals $1.50 and the premium you would receive is $0.59, the max loss is $0.91 for each contract or $91 for one contract of UVXY.  You can alter the Max loss to make sure you only find spreads that have specific risk parameter.

Lastly, you want to make sure the spread expected value is profitable, or a specific minimum. Spread Expected Value, is a statistical measure that tries to predict the profit or loss of the strategy. It is calculated as the sum of all possible values each multiplied by the probability of its occurrence.  The scan will also describe the profit ratio, which is the return you will receive if both options expire worthless.

For this trade you could

  • Sell UVXY December 8, 2017 $13.0 Put at $0.68
  • Buy UVXY December 8, 2017 $11.5 Put at $0.09
UVXY Chart
UVXY Chart

Your potential gain on the trade is $0.59.  You broker will request margin of #contracts * 100 * ($13 – 11.5 + $0.59) or $91 per contract.  Your return if both options expire worthless is 64.8% ($59/$91).

Your maximum loss is the different between the 2-strike prices ($1.5) minus the premium, = $0.91 or $91 per contract.  Your breakeven level is $12.41 = $13 (short strike) minus premium of $0.59.

For this trade you want the UVXY to stay above 13 (2% from current price) until Dec 8th expiration.

Alternative, you could also go to your dashboard and look for alternative but put spreads, using this scan as a guide.

 

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