Put Back

1. Put Back: A Comprehensive Guide for Beginner Traders

The "Put Back" is a relatively simple yet potentially effective trading strategy, primarily used in options trading, but with applications in other financial markets. It's designed to capitalize on short-term price reversals following an initial move, particularly after a breakout or strong directional movement. This article will provide a detailed explanation of the Put Back strategy, covering its mechanics, setup, risk management, variations, and how it differs from other related strategies. This guide is geared toward beginner traders, aiming to provide a clear and actionable understanding of the concept.

What is a Put Back?

At its core, the Put Back strategy anticipates that after a significant price move – either upward or downward – the price will temporarily *return* to a previous level of support or resistance before continuing in the original direction. This "return" or "pullback" is the opportunity the strategy exploits. The name "Put Back" refers to the use of put options to profit from this anticipated temporary decline (or, in some variations, call options for a temporary rise).

The underlying principle rests on the idea that strong directional moves are rarely sustained without *some* level of consolidation or retracement. Market participants often take profit after a significant move, leading to a temporary reversal. The Put Back strategy aims to identify these scenarios and profit from the short-term correction.

How Does the Put Back Strategy Work?

The basic implementation of the Put Back involves the following steps:

1. **Identify a Strong Trend:** The strategy works best when a clear trend is already established. This could be an uptrend or a downtrend. Using indicators like Moving Averages, MACD, or ADX can help confirm trend strength. [1] 2. **Look for a Breakout:** A breakout occurs when the price moves above a resistance level (in an uptrend) or below a support level (in a downtrend). This breakout signals a potential continuation of the trend. [2] 3. **Anticipate the Pullback:** After the breakout, the strategy anticipates a short-term pullback toward the broken resistance (in an uptrend) or support (in a downtrend). This pullback is not expected to negate the overall trend, but rather to offer a better entry point. 4. **Enter the Trade:** This is where the "Put Back" part comes in.

   * **For an Uptrend (Long Put Back):**  Buy a put option with a strike price at or slightly below the previous resistance level (now acting as support).  The expiration date should be relatively short-term, corresponding to the expected duration of the pullback (e.g., a few days to a week).  The expectation is that the price will briefly dip back toward this level, increasing the value of the put option.
   * **For a Downtrend (Short Put Back):** Buy a call option with a strike price at or slightly above the previous support level (now acting as resistance). The expiration date should also be short-term. The expectation is that the price will briefly rise back toward this level, increasing the value of the call option.

5. **Profit Taking:** Once the price reaches the anticipated level (and the option's value increases), take profit. Alternatively, if the price continues to move in the original direction without a pullback, you can cut your losses before the option expires worthless.

Example Scenario: Long Put Back

Let's say a stock has been trading around $50 for a while. It then breaks out above $52, reaching $53. You believe this is an uptrend, but anticipate a slight pullback to test the previous resistance level of $52.

• **Action:** You buy a put option with a strike price of $52, expiring in 5 days. The premium (cost) of the put option is $0.50 per share.
• **Scenario 1: Successful Trade:** The price pulls back to $52. The put option's value increases to $1.00. You sell the put option for a profit of $0.50 per share (minus the initial premium).
• **Scenario 2: Unsuccessful Trade:** The price continues to rise without a pullback. The put option expires worthless. You lose the $0.50 premium.

Key Considerations & Risk Management

• **Option Selection:** Choosing the right strike price and expiration date is crucial. Too far out-of-the-money options will be cheaper but have a lower probability of success. Too close to the current price will be more expensive and offer less potential profit.
• **Time Decay (Theta):** Options lose value as they approach their expiration date, regardless of the underlying asset's price. This is known as time decay. Short-term options are more susceptible to time decay, so timing is critical. [3]
• **Volatility (Vega):** Changes in implied volatility can significantly impact option prices. Increased volatility generally increases option prices, while decreased volatility decreases them. [4]
• **Stop-Loss Orders:** Implementing a stop-loss order is essential to limit potential losses. For example, if the price moves significantly *against* your expectation (i.e., continues to rise in our long Put Back example), you should close the trade to avoid further losses. A common approach is to set a stop-loss at a predetermined percentage below the purchase price of the option.
• **Position Sizing:** Never risk more than a small percentage (e.g., 1-2%) of your trading capital on any single trade.
• **Underlying Asset Analysis:** Thoroughly research the underlying asset before implementing this strategy. Consider Fundamental Analysis and Technical Analysis. [5]
• **Market Conditions:** The Put Back strategy is generally more effective in volatile markets where price swings are more common.

Variations of the Put Back Strategy

• **Double Put Back:** This involves buying two put options with different strike prices, creating a spread. This can reduce the cost of the trade and potentially increase the profit, but also lowers the maximum potential gain.
• **Call Back (for Downtrends):** As mentioned previously, the same principle applies to downtrends using call options.
• **Using Different Timeframes:** The Put Back strategy can be applied to different timeframes (e.g., intraday, daily, weekly). Shorter timeframes require faster execution and more frequent monitoring.
• **Combining with Other Indicators:** Enhance the strategy's accuracy by combining it with other technical indicators, such as:

   *   **Fibonacci Retracement Levels:**  These levels can help identify potential pullback targets. [6]
   *   **Bollinger Bands:**  These bands can indicate overbought or oversold conditions, suggesting potential pullbacks. [7]
   *   **RSI (Relative Strength Index):**  This indicator can also help identify overbought or oversold conditions. [8]
   *   **Volume:** Increasing volume during a breakout can confirm its validity.

Put Back vs. Other Related Strategies

• **Breakout Trading:** While the Put Back *follows* a breakout, it differs in that it anticipates a temporary reversal. Breakout traders typically hold their positions for a longer duration, expecting the price to continue moving in the breakout direction.
• **Mean Reversion:** Mean reversion strategies assume that prices will eventually revert to their average value. The Put Back strategy is more focused on short-term corrections within a larger trend, rather than a complete reversal to the mean. [9]
• **Pullback Trading:** Pullback trading is a broader concept that involves buying during a temporary decline in an uptrend. The Put Back strategy specifically uses options to capitalize on this pullback.
• **Contrarian Investing:** Contrarian investing involves going against prevailing market sentiment. The Put Back is not necessarily contrarian; it's based on the expectation of a temporary correction within an established trend.

Tools and Platforms for Implementing the Put Back Strategy

• **Options Trading Platforms:** Platforms like IQ Option, Pocket Option, tastytrade, and Thinkorswim offer the tools and features necessary for options trading and implementing the Put Back strategy. (Disclaimer: These are examples, and individual platforms' features and offerings may vary.)
• **Charting Software:** TradingView is a popular charting platform that provides a wide range of technical indicators and drawing tools. [10]
• **Options Chain Analyzers:** Tools that help analyze option prices and identify potential trading opportunities.
• **Volatility Calculators:** Tools that help estimate implied volatility.

Common Pitfalls to Avoid

• **Chasing the Breakout:** Entering a trade *after* the price has already moved significantly beyond the breakout level reduces the potential for profit and increases the risk of missing the pullback.
• **Ignoring Risk Management:** Failing to implement stop-loss orders and manage position size can lead to substantial losses.
• **Overtrading:** Trying to implement the Put Back strategy on every breakout can lead to frequent losses. Be selective and only trade setups that meet your criteria.
• **Emotional Trading:** Making trading decisions based on fear or greed can cloud your judgment and lead to poor outcomes.
• **Not Understanding Option Greeks:** Failing to grasp the implications of Delta, Gamma, Theta, and Vega can lead to unexpected losses. [11]

Further Learning Resources

• **Investopedia:** [12]
• **BabyPips:** [13]
• **School of Pipsology:** [14]
• **Options Industry Council:** [15]
• **Books on Options Trading:** Numerous books are available on options trading, covering everything from basic concepts to advanced strategies.
• **Online Courses:** Platforms like Udemy and Coursera offer courses on options trading.

The Put Back strategy, while seemingly straightforward, requires careful planning, disciplined execution, and a thorough understanding of options trading principles. Beginner traders should start with small positions and gradually increase their risk as they gain experience and confidence. Remember that no trading strategy guarantees profits, and risk management is paramount. Continuously refine your approach based on market conditions and your own trading results. Consider practicing with a demo account before risking real capital. Furthermore, understanding concepts like Support and Resistance, Trend Lines, and Chart Patterns will significantly enhance your ability to identify suitable setups for the Put Back strategy. Candlestick Patterns can also provide valuable clues about potential reversals. Finally, staying informed about Economic Indicators and Market Sentiment can help you make more informed trading decisions. Utilize resources like Trading Journals to track your performance and identify areas for improvement. [16]

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