A trading strategy known as a
bull put spread
offers the benefits of put-selling while taking on less
To initiate a bull put spread, the trader sells a put option
and simultaneously purchases another put option on the same
underlying asset with the same expiration date but a lower strike
price. A net credit is collected, and while you generate less
income than you would by selling a put alone, the purchased put
acts as insurance against big losses.
Today, I want to look at a specific bull put spread trade in
Micron Technology (Nasdaq:
Because we may be obligated to buy shares of the underlying
stock with this strategy, it is important that we be willing to
own the shares at the strike price of the put being sold.
Therefore, I'll take a moment to discuss why I am bullish on
Micron Technology manufactures semiconductors, memory chips,
various flash memory drives and other related products worldwide
that are used in smartphones, solid-state drives, tablets and
computers, as well as in other industrial and automotive
From a technical point of view, MU is in a long uptrend.
It has a relative strength (
) rank of 96, meaning it has outperformed 96% of all other stocks
in the past 12 months. It has been proven that stocks with high
RS are more likely to continue outperforming.
MU sold off 3% on news this week that another company had
overtaken it as the world's #2 dynamic random access memory (
) chip producer. According to market research firm DRAMeXchange,
South Korea's SK Hynix garnered 28.2% market share during the
first quarter, edging out Micron's 28%.
I'm not worried about Micron coming in third, and we can use
this volatility to our advantage as it is driving up option
premiums. MU has solid support around $21, and I would be
comfortable owning shares at this level, which is about 22% below
As I mentioned above, we'll be initiating a bull put spread in
which we will be net option sellers, generating a net credit on
the transaction while defining our risk upfront.
Action to Take -->
-- Sell to Open (
) MU Oct 21 Put
-- Buy to Open (
) MU Oct 19 Put
-- Net Credit: $0.30 or better Good Till Canceled (GTC)
If MU is below $21 when the puts expire Oct. 17, we will be
obligated to buy 100 shares per contract at $21 per share. But
because we received $0.30 per share in advance as premium from
the credit spread, the net cost per share will be $20.70 (not
But here is the kicker: We cannot lose more than $1.70 per
share ($170 per contract) on this trade, no matter what happens.
That's because, with a bull put spread, the maximum loss is the
difference between the two strike prices minus the net
If MU is between $21 and $19 at expiration, we would be in the
same position as if we had just sold a put, and we will take
ownership of shares at a net cost of $20.70. However, if MU falls
below $19, the gains from the long put would offset the losses in
our assigned position.
If we only sold a naked October $21 put on MU, we would
receive more premium (about $0.75 as of this writing), but we
would take on more risk. We would incur a loss at any price below
our break-even price of $20.25 per share ($21 strike minus $0.75
in premium) in this example. So, with the suggested bull put
spread above, we are sacrificing $0.45 per share ($45 per
contract) in income -- but reducing our risk substantially.
If MU stays above the $21 short put strike price through Oct.
17, both options will expire worthless, leaving us with the $30
in premium, which represents an 18% return on our risk capital of
$170 in 156 days.
This article was originally published at
No. 3 Chip Maker is My No. 1 Income Play This
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