This week has seen anemic stock and option volumes much like we saw last week. If this trend continues, we could easily see a market that trades sideways, which is a disaster for long options positions. To combat this, we can be a seller of option volatility, and one way to do this is to sell a put spread.
Selling a put spread, also called a bull put spread, is a short volatility/bullish trade that makes money if the stock goes up, doesn’t move or doesn’t go down significantly.
For instance, let’s say stock XYZ is trading at 95. You could theoretically sell the 85/80 put spread for $1. To execute the trade, you would:
Sell the 85 Puts
Buy the 80 Puts
For a total credit of $1.
Here is a graph of the trade at expiration:
As you can see in the chart, you’d make $1 if the stock stays above 85 at the spread’s expiration.
I like this strategy because your risk is capped, and you make money whether the stock goes up, doesn’t move or doesn’t make a dramatic move to the downside.
This is a great income-generating strategy that we will use more often in the coming weeks/months. If Tesla Motors continues its slide, I would anticipate entering such a trade in the coming days.