Innovated Tips from Better Trades

Earning Income on Your Portfolio

When your feeling on a stock is generally positive, bull put spreads are great low risk, limited reward strategies. To create a bull put spread by using put options at or near the current market price of the stock.

For example, if you have a bullish short-term feeling about XYZ when it is trading at $46, you enter a bull put spread by selling the 45 put @ 7 and buying the 40 put for 3. In this case, the maximum profit would be the $400 you received when you initiated the position.

Stock: $46
Buy one 40 put @ 3	($300)
Sell 1 45 put @ 7	$700

The maximum loss would be the difference between strike prices less the $400 credit you received for putting on the trade. In this example, the maximum loss would be $100 ((45 - 40) x 100) - $400.

Stock: $46
Buy one 40 put @ 3	($300)
Sell 1 45 put @ 7	$700

Total Credit	$400

Maximum Profit	$400
Maximum Loss	$100

Stock Price at Expiration	Profit (Loss)	Return on Investment*
$35	($100)	(80%)
$40	($100)	(80%)
$41	$0	0%
$42	$100	20%
$43	$200	40%
$44	$300	60%
$45	$400	80%
$46	$400	80%
$50	$400	80%

*This example does not factor in commissions, interest or tax consequences.
**The Return on Investment is calculated based on the maximum loss of the position before including the initial credit received. The maximum loss in this case is $500.