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The Spread Hacker in Thinkorswim - 2 Scan Criteria for a Bull Put Spread
Updated: Mar 17
How can you scan and pick the best options according to your trading style? You may have wondered this question many times. In this article, we are going to answer this question by investigating together different ways to scan options spreads and particularly bull put spreads.
Main topics discussed in the article:
How to scan an option spread such as a bull put spread;
Automatic scan tools - The Stock Hacker and Spread Hacker in ThinkorSwim;
Scan criteria Instructions in ThinkorSwim;
How to pick bull put spreads with a manual scan activity;
Road map to perform a manual scan activity.
By the end of this article, you should be able to use informatics scan tools such as the Stock Hacker and the Spread Hacker and perform a proper manual scan activity.
How to Scan a Bull Put Spread
A bull put spread is a neutral to bullish strategy having as main purpose to generate an income by selling option premium on a monthly basis. In this kind of option spread, traders buy and sell different options of the same kind (all puts or all calls) with same expiration date and different strikes. As the option sold is priced higher than the option bought traders are able to get a credit.
To find a profitable bull put spread, you have two main options:
Use automatic scan tools;
Scan underlying securities manually.
At first, we are going to analyze two scan tools provided by the company ThinkorSwim (TD Ameritrade). This is one of the most popular brokerage firms in the US for options trading. These guys offer many tools to enhance your trading experience and a great customer service. You may find similar tools by using other firms and, as a result, the main principles of the criteria here described may be applicable to other companies too.
Secondly, we are going to perform a manual scan activity together and I will show you step by step how I personally carry out my scanning by simple looking at charts and analyzing some data.
The Stock Hacker and the Spread Hacker in ThinkorSwim
The ThinkorSwim desktop software comes with two powerful tools: the Stock Hacker and the Spread Hacker. You can use them to literally scan thousands of stocks or options spreads in a few seconds.
I have to warn you that such automatic scan tools work better for horizontal spreads where traders manage option positions with same strikes, but different expiration date (e.g. calendar spreads) rather than for vertical spreads. Despite this, it may be useful for you to utilize these tools to make a first selection of the underlying and then perform a manual scan activity on the remaining stocks.
The Stock Hacker
The Stock Hacker is a tool allowing you to scan stocks for potential trades. Traders can choose to scan over 25000 underlying with the click of their mouse and ThinkorSwim performs the scan requested within seconds.
To find an option spread such as a bull put spread in ThinkorSwim, choose a public list (e.g. S&P500) and set the Stock Hacker as follows:
First Criteria - Volume
You are interested in trading stocks with high volume in order to have liquidity to support your strategy. Type in the min field 1.000.000.
Second Criteria - “Front Vol”
You are interested in selling options (with expiration date at roughly 30 days) with implied volatility higher than the options purchased. Depending on the overall market conditions, you should be setting the “front vol” at min 30%, because you are selling and you want to receive a huge credit.
For any position detected from the computer, make sure that the options purchased have lower implied volatility than the ones sold to make the likelihood of success by your side.
The Spread Hacker
The Spread Hacker is a scanning tool specifically thought to look for option spreads by selecting the correct search criteria.
To find a bull put spread in ThinkorSwim, choose a Public List (e.g. S&P500) and set the Spread Hacker as follows:
On the top of your desktop platform, click on the menu “search” and select “Vertical”.
First Criteria - Days to expiration
You are interested in trading options that are about to expire within 35 days or less in order to benefit from the effect of time decay. Type in the min field 15 and in the max field 35.
Second Criteria - “Front Vol”
You are interested in selling options (with expiration date at roughly 30 days) with implied volatility higher than the options purchased. You should be setting the “front vol” at min 30%, because you are selling and you want to receive a huge credit.
For any position detected from the computer, make sure that the options purchased have lower implied volatility than the ones sold to make the likelihood of success by your side.
The two criteria outlined above are very important to follow. After that you may choose to set some optional criteria to make your search suits your trading plan. An example of additional criteria is found below:
Third Criteria - Underlying Price
You may feel more comfortable either trading stocks with high or low price levels. For instance, if you prefer high priced underlying, type in the min field 40 and in the max field 100.
Fourth Criteria - PL/Margin
According to the cash available in your account and your money management, you may prefer placing a trade whose margin is within a certain amount. For instance, if the maximum margin you can afford for a trade is $2000, type in the max field 2000.
Manual Scan Activity
Instead of using automatic scanning tools, you can also perform the scan activity manually. Actually, this is the option I prefer in case of option spreads, even though, at the beginning it can take a long time and a great deal of patience.
The reason why I usually perform a scan activity manually is because it allows you to have an overall picture of the financial market. In fact, it is carried out by checking patiently each and every stock contained in the major public lists and, as a result, it dramatically helps you to build knowledge of the market.
When I do this activity, I usually look for stocks with major or secondary points of support. Once detected one of these points, even if the stock is being traded far from my target price, I set an alarm on the trading platform in correspondence of that support. Doing so, the computer will advise me when the stock is at or below my target price in any moment in the future.
If this activity is properly performed when you scan stocks for the first time, you can arrive at a point in which will be the broker to advise you when stocks are being traded at your target price. At this stage, it will not be any more required much more effort from your part. Naturally, this activity involves knowledge of basic technical analysis skills.
Road Map to Perform a Manual Scan Activity
If you want to perform a manual scan activity as I usually do, let us get started by using public lists such as the DJX (Dow Jones Index) and the SPX (S&P 500). As a rule of thumb, you should always look for underlying with high liquidity, preferably over 1.000.000 Average Daily Volume (ADV).
After choosing the underlying security, check if the stock owns options. Look for options with high liquidity, the open interest should be at least 100 but it would be better 500.
Make sure the stock trend is upward or range bound. Remember that in a bull put spread you are bullish or neutral to bullish, so you want the stock went up or were sideways.
Check for a clear area of support. This is one of the main points. Remember: you can’t easily predict where the market will move next, but you can try to understand where it will not move within a certain period of time. Taking this in your mind, you can make better financial decisions.
To find a point of support, you must look at the chart and identify where in the past the stock has stopped its downtrend. You will be impressed to see how often stocks respect these points.
If all the above-mentioned conditions are respected, check the option chain to find the best strikes to trade amongst options whose expiration date is within 25 - 35 days. Try to find an option spread with a risk-reward ratio that suit the best your trading style and your money management rules.
Remember that in a bull put spread you want to maximize your net credit and keep as much low as possible your maximum potential loss. As we said before, to achieve this result you must sell options with higher implied volatility than the ones purchased creating a positive spread.
To sum up, when a stock reaches a major support after a steady downtrend, be ready to sell more expensive options and purchase cheaper ones to get into the position with a bull put spread.
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