Well, stocks look like they may have stabilized at these levels… and since it’s a holiday-shortened week in observance of Memorial Day, things might get a little volatile.
So I want to shift the attention to something that has been working for me — options.
However, I’ve noticed people are on the sidelines and not even thinking about learning how to trade options.
I believe it’s due to fear…
Whether it be fear of:
- Failure of learning something new
- The risks involved
- Making mistakes
Whatever the case may be, it’s okay to have doubts and be skeptical at first… heck, I was when I started to learn options trading.
But it hit me… the best way to overcome fears in the market was to arm myself with knowledge, and man was I glad I stuck to it.
Today, I want to show you what I’ve learned and how I overcame my fears of learning how to trade options.
When you’re trading options… I believe it pays to know where your breakeven points are.
Well, think about it like this, let’s say you’re in an options position and you’re up money… you decide to take some profits off the table… and let the rest ride.
However, you don’t take into account your breakeven point and you end up turning a winner into a loser.
Not only that, having a break-even point lets you know when you’ll start losing money on a position.
I believe by knowing where the break-even points are can help to overcome the fears associated with trading options.
With that being said, knowing where the break-even points are can help traders achieve profitability… and when you’re trading options, specifically options spreads, you know where your breakeven point is off the bat.
Calculating Breakeven for Bull Put Spread
This has been one of my money makers recently, and if you want to learn how I use the bull call spread to my advantage and generate profits like these…
… all while stacking the odds to your favor and placing “safe” bets… then click here to learn more.
Now, when I’m trading this strategy I know exactly where my max loss, max profit, and breakeven are at all times.
For example, here’s a look at the risk profile (profit and loss chart) for the bull put spread strategy.
To set up this strategy, you would sell puts at strike price B and buy the same number of puts at strike price A. Generally, you want the stock to be trading above strike price B.
If you look at the chart above, you’ll notice an encircled area. Well, that’s the break-even point. Typically, your brokerage platform will let you know your break-even point before you place the trade.
However, if your broker doesn’t show where your breakeven is… it’s actually simple to calculate, in my opinion.
For example, let’s say a stock is trading at $100, and I’m bullish on it based on a chart pattern. Well, to put on the bull put spread, I would look to sell puts with a strike price of $95 and simultaneously buy puts with a strike price of $90.
Now, let’s say I received a credit of $2.50 for placing the trade. That said, my breakeven point will be strike price B ($95 in this example) minus the net credit received ($2.50 here). That means if the stock falls below $92.50… I would start losing money.
Why is this helpful?
Well, even though you know your max loss for the bull put spread… maybe you don’t like taking on a whole lot of risk… so you could set a stop-loss, where you would close out the position if the stock trades at $92, rather than holding onto the position and potentially get to the max loss.
Now, let’s look at another spread strategy and how you can calculate your break-even point for it.
Bear Call Spread Breakeven Point Calculation
With a bear call spread, also known as a short call spread, you would buy calls at strike price B and simultaneously sell calls at strike price A.
Typically, you would want the stock price to be trading below strike price A. That said, this means you’re neutral to bearish. In other words, you think the stock will trade below a specific level.
For example, let’s say you notice a bearish chart pattern in a stock that’s currently trading at $98. Now, you think the stock will stay below $100.
That said, the bear call spread could be set up by selling $100 strike price calls, while simultaneously buying calls with a strike price of $105. Now, let’s assume you were able to place that trade and receive a net credit of $1.50.
That said, your breakeven is equal to strike price A ($100 in this example) plus the net credit received ($1.50 here). That means if the stock starts to trade above $101.50… you would start to lose money.
So if you’re risk-averse and like to play it on the safe side… maybe you set a stop-loss so that if the stock trades above $102.50… you would close out the position for a small loss.
Now, if you’re looking to trade options – or options spreads – I believe it pays to know where your breakeven points are because it allows you to manage your risk properly and protect your portfolio… in case things turn sour…
…many people are scared of options because there is fear that they could lose a lot of money.
However, that’s why I developed Weekly Windfalls… to show traders they can put their fears aside and use a risk-defined strategy to trade options. If you want to learn more about how I trade options spreads, check out my eBook, Wall Street Bookie. Click here to claim your complimentary copy.