I trade options and like the short put spread option strategy when I’m bullish on a stock. With a short put spread:
- my risk is capped (I know exactly how much money I can lose)
- I know my maximum potential profit up front, and
- the margin requirement is minimal
To set up an option play, my analysis is always thorough; however, this doesn’t mean I’m guaranteed to profit – profitability is never guaranteed. If anyone tells you otherwise, they either don’t know what they’re talking about, or they’re lying.
I analyze potential option plays post market-close, pre-market open, and intra-day. Though prices can change dramatically overnight and intra-day, by starting my analysis after the end of a trading day, I can focus more intensely on my analysis, without the distraction of intra-day news and price swings. Having analyzed closing-prices, I can prepare for anticipated price moves when the next trading session begins.
Two things I look at in detail are an option’s open interest and daily volume. I want to know which strike price has the greatest number of open contracts and the trading activity in those contracts. This is important because it’s a potential indication of where large traders (institutional investors, etc.) may try to pin a stock’s price at option expiration.
I sell out-of-the-money put options (i.e. options with a strike price lower than the current market price). I usually make sure the put options I sell have a strike price at or below that of the put option with the most open interest. I simultaneously buy put options on the same underlying security with a lower strike price, which limits my risk: I can only lose the difference between the strike prices plus commission, less the premium I received (credit received for selling a put option).
I prefer using this strategy in a short time frame prior to option expiration. By this I mean anywhere from a few days to a few weeks prior to expiration. This hopefully allows me to capitalize on the fact that a stock’s price may stay in the range I desire, maximizing my profit potential. I want the options to expire worthless so I keep as much of the premium a possible (100% if the options expire out-of-the-money).
