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
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.
Risk and Reward
Maximum Reward :
Advantages and Disadvantages
Exiting the Trade
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.
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