Do you know how to look for long signals that indicate a stock has bottomed out?
Today SlashTraders will show you how to use our unique trading system and the Bull Put Spread Screener to find heavily undervalued stocks that you can buy the dip by trading high probability and high return bullish options.
What Is a Bull Put Vertical Spread?
A Bull Put Vertical Spread works by combining a short Put and a long Put at different strike prices that expire at the same time. The Put Vertical Spread is profitable if the underlying price goes up before the option expires.
Let's review the profit analyses of selling and buying Put options. We receive a premium when we short a Put option. If the underlying price goes up we make a profit.
Although a Naked Put is easy to execute, if the underlying price goes down, the maximum loss is unlimited.
We pay a premium when we long a Put option. If the underlying price goes down we make $100 for every $1 drop.
But if the underlying price goes up instead, the value of the Put option expires worthless.
When we combine a short Put and a long Put at different strike prices we create a Put Vertical Spread. Since we want to trade bullish, the strike price of the short Put would be higher than the long Put.
Compare this to a short Naked Put, a Bull Put Vertical Spread can limit the maximum loss if we are wrong about the direction.
Why Bull Put Spread?
If we are confident about a bullish outlook, trading a short Bull Put Spread has higher leverage than buying stocks.
We can use AAPL to compare the differences between trading a Bull Put Vertical Spread that expires next month, and buying stocks. An ATM Bull Put Spread has a 54% chance of success, while buying stocks has a 50% success rate.
If AAPL price goes up by 10% in 41 days, we gain 10% profit from a stock trade, while a Bull Put Spread gains 73% return.
If we are wrong about the price direction, the Bull Put Spread loses 100% of the Buying Power.
What Are the Key Points to Profitable Bull Put Spreads?
When selling Put Spreads, we have a positive delta, so we want the stock price to go up to decay the option value, then we can buy to close the trade.
Delta is the changes to options price with respect to changes in the underlying price.
A positive delta trade is profitable when the stock goes up, and the trade loses when the stock price drops. If the stock price stays above the short Put strike, we can wait for the options to expire worthless for a profit.
Maximum loss of a Bull Put Spread = width of the Put strikes x 100 - premium collected
Buying Power = maximum loss
So when the Put strikes' width stays the same, a higher delta leads to a higher premium, lower maximum loss and higher returns.
Let's look at two AAPL Bull Put Vertical Spreads with the same $5 widths.
When the short Put is at 0.50 delta, the maximum return is 73%. When the short Put is at 0.20 delta, the maximum return is only 15%.
How to Use the Bull Put Spread Screener to Find Bottom Out Bullish Trades
The Bull Put Spread Screener uses historical chart analysis to find bottom out stocks that have a high probability of an upward correction that we can sell Bull Put Spreads to profit from the dip.
We want to find heavily undervalued, bottomed out underlying that have a high probability of going up.
- Long Days indicates the number of trading days since the most recent bullish signal, based on technical analysis. A small number means we can enter the trade at the start of the bullish trend.
- Long Signal Price shows the recent dip based on technical analysis. We can be confident the stock price will not fall below this price level in the short term.
- Fundamental analysis shows us the Fair Value of the underlying. Then it compares with the Last value to find the potential Upside. The higher the Upside, the greater the confidence of the stock being undervalued.
We can combine the 3 bullish signals in the screener to execute high probability bullish trades. The screener also helps us find high Return on Capital 0.50 delta ATM Bull Put Spreads.
Then we can use the Spread Details to find the ATM Bull Put Spreads with the respective Return on Capital.
The Best Bottom Out Bull Put Spread Right Now
Let's pick the highest probability and high return Bull Put Vertical Spread entry points.
By combining Long Days and Upside, out of all bullish stocks that started within 2 trading days, FB is extremely undervalued with 97% upside. So it has a high probability of a bullish trend.
The FB price chart shows it reached a low point at Long Signal Price of $169 2 trading days ago, and has been bullish ever since.
Considering FB is heavily undervalued, we can be confident of a bullish outlook.
We can sell a FB Bull Put Spread option that expires next month. If the Meta stock price does not fall before expiration, we can profit 103% from the trade.
Now you know how to use the Bull Put Spread Screener to find bottomed out stocks that are trending upwards. Remember to use the screener often to find the best bullish Put Spreads to sell and profit from the rising trend.
How to Roll a Bull Put Vertical Spread?
If the stock price is down with less than 14 days to expiration, we can roll the losing Put Vertical Spread to next month and wait for the stock price to rise in the future.
If SHOP's Bull Put Credit Spread is losing due to a drop in stock price while we maintain a bullish outlook, we can roll the contract forward.
When rolling a Bull Put Spread, we need to close the existing Put Credit Spread, and sell to open a new Put Spread that expires next month.
We can consider widening the Put Spread to increase the premium received to offset our existing losses.
As a result, we create a longer date Bull Put Credit Spread with additional credit from longer time value and wider strike prices. Then we can wait for the SHOP stock price to bounce back in a bullish manner and profit from the new trade.
Now you know how Bull Put Spreads work, you can use the Bull Put Spread Screener to find the best bullish entry points.