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For all the long-term stock holders out there who are very comfortable buying stock, there is an option technique that you might want to consider to help you acquire your favorite or chosen equity at a discount. It involves employing the bull put spread.  

After performing the necessary fundamental and technical analysis that is the normal part of a successful trader’s due diligence, a stock purchase decision is typically ready to be made. However, instead of rushing out and just purchasing the stock, put on a bull put spread position. A bull put spread involves buying a lower strike price put that, in this case, will be out-of-the-money and a sale of a put either at or near-the-money. Since the put sold will have a higher strike price and a higher premium, the trade is done for a credit. The lower put acts as protection in the event the stock makes a dramatic move to the downside.

The credit received from the bull put spread is what gives the trader the ability to purchase the underlying stock at a discount. To illustrate assume the stock investor has determined that XYZ is a stock he or she would like to purchase currently trading at $53 per share. Instead of purchasing the stock the equity investor instead enters into a bull put spread by buying the June 45 put @ .50 and selling the June 50 put @ 2.00 with less than 45 days to expiration and receiving a net credit of $150.

The position is profitable if XYZ finishes above the $48.50 breakeven at expiration and if the XYZ stock settles at $50 or above by expiration then the equity investor can keep the entire $150 as profit. In this case the investor still gets to participate in the stock’s move upward and with far less capital invested. In addition, if they still like the stock they then can create another bull put spread position for the next month out.

However, if the stock turns down modestly—say, down to the $49.80 area at expiration— then the equity investor would be assigned 100 shares of stock at $50 that they could either sell at the current market price of $49.80 and make a $130 profit, since the cost basis is now 48.50 due to the bull put spread. The investor can also choose to keep the stock if they are still bullish at the cost basis of $48.50. Remember, this is a stock the equity investor was willing to buy at $53 per share originally and now owns it at $48.50, while at the same time the market has it priced at $49.80.

Now if the stock declines below the $45 mark then the maximum the equity investor could lose is $350 from the bull put spread which is far less than they would have lost if they had originally purchased the XYZ stock at $53. In this price breakdown scenario the equity investor could have lost anywhere from $800 at the 45 price to $5,300 if the price were to continue all the way down to zero.

This is why the traditional stock investor should look at using bull put spreads before purchasing the stock. Not only can you make profits on the bull put spread, but also you can actually buy the stock that you like so much at a market discount. Plus if the equity investor was wrong about the underlying issues and the stock crashes or significantly declines, then they lose far less money by employing the bull put spread versus initially purchasing the stock outright. Try it next time you are ready to buy your favorite stock in 100 share increments.

Happy Trading.


Jeff Neal
Senior Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
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