On July 30, 2020, we sold a bull put credit spread on ET stock set with expiry in the next 29 days (August 28, 2020)
Here is our trade setup:
- BOT 1 ET AUG 28 '20 - 6.5 + 5.5 Put Bull Spread -0.42 USD
For this trade, we got a premium of 37.2 USD (after commissions) or a 5.72% potential income return in 29 days. That's more than a dollar per day!
These trades come as the #38 and #39 in the month of July, and if we stick with our trading plan for this month, premium generated from this trade setup makes us about 5.31% from our $700 monthly goal, while in total we have already reached 114.23% from our monthly goal.
We are selling credit spread in order to save on cash locked for margin. credit spreads are a cost-effective way for small traders wishing to squeeze more from the invested dollar. And the savings are huge. Selling 1 dollar wide credit spread we had to put on lock about $89. If we were selling just a put our margin impact would be about $250.
What happens next?
On expiry date (August 28, 2020) ET is trading above $6.5 per share - options expire worthlessly and we keep premium - if ET trades under $6.5 on the expiry date, we get assigned.
But as we already have collected a premium of 0.372 per share, our break-even price for this trade then is $6.5-$0.372 = $6.13
In other words, ET can fall from the current price of $6.54 way down to $6.13 and we will still be break-even
As we are selling credit spread here, in case ET suddenly drops bellow our second bought put at the strike price $5.5 it will help to mitigate risk, in other words - selling credit spreads has some interesting advantages to consider.
- Running Total 15 Trades since April 6, 2020
- Options Income: $276