Okay, folks, welcome again. Casey Jensen here at OptionsANIMAL. Now we're discussing a bull put spread. This is one of my favorite trades. It's a good way to target a consistent profit. It's known as a high probability trade. Let's talk about how this works, so bull put.
Let's say a stock is trading at 42. Notice my little mock chart here, nice slowly bullish trend. Well, what we'll do is we'll go sell. Maybe in the month of August, they say has 30 days to expire. We'll go sell say strike price 40 in a put option. That acts as our primary insert points. If you notice here, SP for short. We're going to sell the puts, strike price 40, month of August, 30 days to expire. Bring in 75 cents of credit. We always get paid at the bid price when we sell.
That's my primary instrument and how that works. I want the stocks to stay above 40, and I get to keep that 75 cent credit. Those options will expire worthless, and that's how that works. Now, that's known as just a naked put if you're just selling the put option. What I'll do now is I'll go out and buy a put option, same expiration month. Now I'll go down a strike price to strike price 35, buy the asset, it will cost me 50 cents.
If you notice here, long put for short, 35 strike, August, 30 days to expire. It's going to cost me 50 cents. The total credit in this trade is 25 cents. 25 cents per share times at my one option contract or a five option contract or 10, however many contracts you want to trade depending on the kind of risk you want to take on. The risk with this trade is defined as simply the difference in the bid, excuse me, in the strike prices, so 40 minus 35 is a $5 spread, but that's not my risk just yet. We need to now subtract the credit that I have so take away 25 cents. The most I can lose in this trade is $4 and 75 cents per share.
Limit your risk. This is a high probability trade. This one's pretty close to the money, $42 in the stock. Sometimes you might sell to 35 and maybe buy to 30, depending on what kind of credit you can receive. In this case, being a little bit more aggressive with this one that I'm setting up.