You are currently browsing the tag archive for the ‘SLV’ tag.

This vertical spread trade was started on March 23, 2009.

SLV traded for $13.17 at the close on Friday July 17th.  Both Puts, the one sold (written) and the one bought (long), expired worthless.

We realized the maximum gain for this trade of $0.40 (less trading costs), if we assume $0.15/share as trading costs, we have a gain of $0.25/share.  We risked $0.75/share, which makes our return on this trade 33% (0.25/0.75) for four months or approximately 100% APR.

Please note that $0.15/share trading costs assumes that only one option contract was used.  These costs go down (dramatically) if more than one option contract is used which would raise the return of this trade.

Advertisements

The Bull Put Spread is set up by buying a LOWER strike Put while simultaneously selling a HIGHER strike Put, both with the SAME expiration date.  This trade is also known as a Vertical Spread, because the expiration months are the SAME.  The Bull Put Spread is a Credit Spread, meaning you will receive a higher price for the Put that you sell than you wil pay for the Put that you purchase.

In order to enter this position the investor will have some beliefs.

          1)  She believes that the underlying security will stay the same or go up.  Depending on the strikes chosen, the underlying security can even go down a little and this position will still make money.  That is why this position has the word Bull in the name, it has a bullish bias.

          2)  The investor understands that IF the underlying stock moves counter to the postion, in this case, down, the position can lose 100% of the money at risk.  The good thing about a vertical spread, however, is that the options WILL retain some value, up until, expiration.  This means that a 100% loss can be avoided.

Lets look at an example:

In a recent Trading Idea I said to buy a July 2009 $12 Put while selling a July 2009 $13 Put on SLV  (IShares Silver ETF).  Here is the Risk/Reward graph for this position. 

Bull Put Spread - SLV (IShares Silver ETF)

The Maximum Loss is $0.60 ($1.00 difference in stikes – $.040 premium), and this will occur if SLV is trading below $12 at expiration, July 18, 2009.

The Maximum Gain is $0.40 (Premium recieved for position), and this will occur if SRS is trading above $13 at expiration, April 18, 2009.

The breakeven is if SLV is trading at $12.60 at expiration, July 18,2009.  The breakeven for this postition can be calculated by taking the strike price for the option sold (the $13 Put) – the premium received ($0.40).  If SLV is trading below $12.60, this position will have a loss.   If SLV is trading above $12.60 this position will have a gain.

Today SLV is trading for $13.68.  This means that SLV can lose 5% ($0.68)between now and July 18th and this position will still have the Maximum Gain.  SLV can lose 7.9% ($1.08) in that time frame and this position will Breakeven (not including trading costs).  SLV has to lose more than 12% in this time frame to incur the Maximum Loss.

Vertical Spread Example (Credit Spread): 

 

Sell SLVSM            July 2009    $13 Put             $1.20

Buy SLVSL            July 2009     $12 Put             $0.80

 

Net Premium               $0.40 (-Trading Costs)

 

Maximum Loss            $0.60 ($1 difference in strikes – $0.40 premium received) (+Trading Costs)

 

Maximum Gain            $0.40 (-Trading Costs)

 

SLV is trading for        $13.61 at the close on Friday 03/20/09