Asset 7
Asset 7

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The selected stock has been moving directionally lower for some time and is now displaying behavior suggesting that the underlying stock is likely to begin trading sideways or higher.

When an underlying stock is coming to the end of a directional move lower, it’s a great time to look at high probability idea like a “Put Spread”

Enter a Put Spread (Sell 1 put at one strike price while simultaneously buying a put at a strike price lower than the first). To construct this position:

  • Current Stock Price: $X/share
  • SELL TO OPEN 1 PUT OPTION at a strike price .30 deltas below the current share price
  • BUY TO OPEN 1 CALL OPTION at a strike price even further below the current share price
  • >> The resulting order contains 2 option contracts in total and is entered as a “credit” 

The max projected loss for this investment is calculated by taking into account the cashflow received by the total position at expiration.  When selling a put spread, the probability of success is greater than 80%

The selected stock should end it’s downward progression causing the credit collected to shrink and taking the investment into profit. An investor can close the trade for profit when the available credit is smaller than the original credit collected for it.

The underlying stock continues to trade lower and has a daily close below the sold put strike price.