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Options Strategy – Bull Put Spread


A Bull Put Spread, also known as a Short Put Spread, is an options trading strategy used when a trader expects a moderate rise or stable movement in the price of the underlying asset. This strategy involves selling a put option at a higher strike price while simultaneously buying another put option at a lower strike price, both with the same expiration date. The goal is to generate a net credit (premium received minus premium paid) while limiting potential losses.

  • Market Direction: Bullish
  • Difficulty: Intermediate

How It Works

  1. Sell a Put Option: The trader sells a put option with a higher strike price.
  2. Buy a Put Option: The trader buys a put option with a lower strike price.
  3. Market Movement: The trader benefits if the price of the underlying asset remains above the higher strike price.
  4. Profit and Loss: The maximum profit is the net credit received, and the maximum loss is the difference between the strike prices minus the net credit.

Example of a Bull Put Spread Strategy

Let’s say you expect the stock price of Company XYZ, currently trading at $50, to rise or stay above $45. You decide to implement a Bull Put Spread with the following specifics:

  • Sell Put Option: Strike Price $45, Premium Received $3 per share
  • Buy Put Option: Strike Price $40, Premium Paid $1 per share
  • Expiration Date: 1 month from now

You trade one put option contract, which represents 100 shares, so your net credit is:

100 shares×($3−$1)=$200

bull put spread options strategy

Scenarios

  1. Stock Price Remains Above Higher Strike Price ($45)
    If, at expiration, the stock price remains at $50 or rises:
    • Both put options expire worthless.
    • Keep the Net Credit: You keep the $200 net credit.
    • Net Profit: $200 (net credit received).
  2. Stock Price Falls Below Lower Strike Price ($40)
    If, at expiration, the stock price falls to $35:
    • The sold put option is exercised.
    • Loss on Sold Put: $45 (strike price) – $35 (market price) = $10 per share.
    • Gain on Bought Put: $40 (strike price) – $35 (market price) = $5 per share.
    • Net Loss: $10 – $5 = $5 per share.
    • Total Loss: $5 x 100 = $500.
    • Adjusted Loss: $500 – $200 (net credit) = $300.
  3. Stock Price Between $45 and $40
    If, at expiration, the stock price is between $45 and $40:
    • The sold put option is exercised.
    • Gain on Sold Put: $45 (strike price) – $50 (market price) = $5 per share.
    • Loss on Bought Put: $40 (strike price) – $45 (market price) = $5 per share.
    • Break-even Point: The trader neither gains nor loses additional money beyond the initial net credit.

Benefits of Bull Put Spread

  • Income Generation: Provides income from the net credit received.
  • Limited Risk: The potential loss is capped by the lower strike price of the bought put option.
  • Bullish to Neutral Outlook: Profits if the stock price rises or remains steady.

Risks of Bull Put Spread

  • Limited Profit: The maximum profit is limited to the net credit received.
  • Potential Loss: Losses can occur if the stock price falls below the lower strike price.

The Bull Put Spread strategy is an effective way to capitalize on a bullish or neutral outlook with limited risk and defined potential profit.

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