Bull Put Spread. The bull put spread option trading strategy is employed when the options trader thinks that the price of the underlying asset will go up moderately in the near term. The bull put spread options strategy is also known as the bull put credit spread as a credit is received upon entering the trade.if you expect that a security is going to rise in price, but not by much. As you can also make a profit if the price of the security doesn’t move at all, it’s a good strategy when you aren’t fully confident in your bullish outlook.
– Bullish Strategy
– Not Suitable for Beginners
– Two Transactions (write puts & buy puts)
– Credit Spread
Bull Put Spread Construction
– Buy 1 OTM Put
– Sell 1 ITM Put
Bull put spreads can be implemented by selling a higher striking in-the-money put option and buying a lower striking out-of-the-money put option on the same underlying stock with the same expiration date.
Limited Upside Profit
If the stock price closes above the higher strike price on expiration date, both options expire worthless and the bull put spread option strategy earns the maximum profit which is equal to the credit taken in when entering the position.
The formula for calculating maximum profit is given below:
– Max Profit = Net Premium Received – Commissions Paid
– Max Profit Achieved When Price of Underlying >= Strike Price of Short Put
Limited Downside Risk
If the stock price drops below the lower strike price on expiration date, then the bull put spread strategy incurs a maximum loss equal to the difference between the strike prices of the two puts minus the net credit received when putting on the trade.
The formula for calculating maximum loss is given below:
– Max Loss = Strike Price of Short Put – Strike Price of Long Put Net Premium Received + Commissions Paid
– Max Loss Occurs When Price of Underlying <= Strike Price of Long Put
The underlier price at which break-even is achieved for the bull put spread position can be calculated using the following formula.
– Breakeven Point = Strike Price of Short Put – Net Premium Received