Use past occurrences of the current market condition to understand the likelihood for a Bull Put Spread's success.
Perhaps you’ve found yourself in this situation.
The index appears to be trading within a range, well above support, and then a down-day makes implied volatility rise and those out-of-the-money puts seem too rich to resist selling. It may seem like a decent time to open a Bull Put Spread position and possibly a campaign.
Once implemented, the market hovers around a bit and then collapses and goes against you.
Wouldn’t it have been nice to have an indication that the probabilities were against you on that day in question?
Well, we have some good news. Our Index Bull Put Spread Timing Report does just that.
In this example, our report indicated a trading edge of negative 6.4%, clearly a red flag for index put option sellers.
Based upon past behavior of the market when in similar conditions, the probabilities were greater than normal that the day in question would end up being unfavorable for Bull Put Spread positions. Our analysis includes historical behavior not only of the index itself, but also of the VIX as well.
Here is a report that shows a positive edge which means the probabilities were greater than normal that the day in question would end up being favorable for opening a Bull Put Spread.
Many traders think they have to wait for the perfect technical or fundamental setup to occur before opening a Bull Put Spread position. Our Bull Put Spread Timing Report displays, after each trading day, the statistical edge level for opening a position.
This now opens up the possibility of making probability-based decisions on an ongoing basis and you can now layer-in several positions over time.
If the report keeps showing positive edges, for example, you could place a new spread on each week and build an inventory in multiple expiries and therefore diversify your exposure.
To learn about the specifics that go into our Bull Put Spread trading edge figures, please watch the 30 minute video above.