In this article I highlighted an example (please note the ruse of the word “example” and the lack of the word “recommendation”) of a”bull put credit spread” using options on ticker JNK, an ETF that tracks a junk bond index.
At the time of the initial example, JNK was trading at $33.51. The “catalyst” was a fairly flimsy theory that JNK could be forming “double bottom”. See Figure 1.
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Figure 1 – Original JNK Bull Put Spread (Courtesy www.OptionsAnalysis.com)
The original article discussed a near stop-loss and a far stop-loss. The near stop-loss was $32.92 which was hit after just a few days when the double bottom failed to hold. An exit there would have resulted in a loss of roughly-$430. See Figure 2.
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Figure 2 – Near stop-loss hit (Courtesy www.OptionsAnalysis.com)
The far stop-loss was the trade’s breakeven price of $32.43. That price was hit on 1/20 and would have resulted in a loss of roughly $-730. See Figure 3.
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Figure 3 – Far stop-loss hit (Courtesy www.OptionsAnalysis.com)
So What Have We Learned?
As you can see in Figure 1, 2 and 3, this hypothetical trade was a distaster pretty much from the get go. So what have we learned? A few possibilities come to mind. We learned:
*What a bull put credit spread is and how it works.
*The importance of determining in advance at what point you will exit a trade and the importance of sticking to your trading plan.
We may also have learned that a bull put credit spread is a decent strategy for playing a “potential double bottom” if one is so inclined. But perhaps we also learned that relying on “potential double bottoms” as a trading catalyst –particularly in the face of a sharply declining market – may not be the best trading idea in the world
Jay Kaeppel
