Bull Put Spread
Direction: Bullish to Neutral

Strategy Description

Bull Put Spread is one of the vertical spread option trading strategies. It usually involves selling a put option and buying a lower strike put with the same expiration date. It is also known as Short Put Spread or Put Credit Spread

Bull Put Spread = Short (Naked) Put(At a higher strike) + Long Put (At a lower strike)



Outlook
: With this stock option trading strategy, your outlook is bullish to neutral.

You are expecting a mildly rise in the underlying stock price and/or a drop in volatility.


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Risk and Reward

Maximum Risk:

  • Limited to the Different in Strike Price of the put options Less Net Premium Collected for the spread.

Maximum Reward :

  • Limited to the amount of net premium collected from the spread.

Breakeven :

  • Higher Strike Price of the put options Less Net Premium Collected

Net Position:

  • This is a net credit spread as you sell a higher strike put (collect higher premium) and buy a lower strike put (pay lower premium) of the same expiration date.

Advantages and Disadvantages

Advantages:

  • Time erosion of options values help trader of this Bullish Put Spread when it is in a profit position but is harmful to the trader if it is in a loss position.
  • May profit from three scenarios: underlying stock price rises, move sideways, or drop by a relatively small amount.
  • Reduce the downside risk as compared to a Short Put Strategy.
  • Exit strategy is determined in advance when placing the spread.

Disadvantages:

  • Profit potential is limited to the Net Premium Collected if the underlying stock price rises.
  • Maximum loss is typically greater than the maximum gain, even though the downward risk is capped.

Exiting the Trade

  • Let the options expire worthless and earn the full sum of premium collected
  • Simply offset the spread by buying back the put options that you sold and selling the put options that you have bought in the first place.
  • As the underlying stock fluctuate up and down, advance option traders may choose to unravel the spread leg by leg. In this way, the trader will leave one leg of the spread exposed while he profit from the closure of the other leg.

Bull Put Spread Example

Assumption: XYZ is trading at $169.50 a share on Mar 20X1. You are expecting share price of XYZ to rise or at least moving sideway. However, you do not wish to trade a short put strategy due to the unlimited risk exposure involved. In this case, you may consider to sell one Apr 20X1 $165 strike put at $6.20 and buy one Apr 20X1 $160 strike put at $4.50 to profit from the bullish to neutral outlook of the stock. Note: commissions are NOT taken into account in the calculation.

Bull Put Spread Example

Bull Put Spread Options Strategies

Analysis of Bull Put Spread Example

Maximum Risk = Difference in Strike Price Less Net Premium Collected = ($165 - $160) * 100 - $170 = $330
Maximum Reward = Net Premium Collected = ($6.20 - $4.50) * 100 = $170.
Breakeven = Higher Strike Price of the put options Less Net Premium Collected = $165 - $1.70 = $163.30

This is a vertical spread strategy that creates a net credit position in your account. When you entered into this spread, you are moderately bullish on the underlying stock and are looking for a way to earn income from the bullish outlook while limiting the risk exposed. The sold put will produce the income element for the trade and the bought put will have the effect of limiting your risk exposed.

Try to ensure that the underlying stock is in a upward trend or trade within a limited range of stock prices when you are using this strategy.

Identify a clear area of support.

Remembering that the last month of an option’s life has the greatest amount of time value erosion occurring.


Therefore it is preferably to use this option trading strategy on a short term basis with about 1 month left to expiration so as to give yourself less time to be wrong. Use the same expiration date for both legs of the put.

There are literally thousands of Bull Put Spread combinations available. Each has its own unique risk, reward, time frames, volatility characteristics and probabilities of success. You should pick the combination of the spread according to your risk/reward tolerance and forecast outlook of the underlying stock. Selecting the option trading strategies with appropriate risk-reward parameters is important to your long term success in trading spread.

Bull Call Spread Bear Put Spread Long Iron Condor
Bull Call Spread
  • Bullish Strategy
  • Limited Risk
  • Limited Profit
  • Debit Trade
  • Same risk profile as Bull Put Spread
  • Long Call + Short Call
Bear Put Spread
  • Bearish Strategy
  • Limited Risk
  • Limited Profit
  • Debit Trade
  • Opposite risk profile of Bull Put Spread
  • Long Put + Short Put
Long Iron Condor
  • Sideway Strategy
  • Limited Risk
  • Limited Profit
  • Credit Trade
  • Bull Put Spread + Bear Call Spread


Next go to a bearish strategy, Long Put, to learn how profit can be make from a bearish stock.

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