Bull put spread

Bull Put Spread

Post By - Laxmi Mahera
Review By : Rohan Sharma
Updated on : October 25, 2021

Basic Concepts - Bull Put Spread

Description - Bull Put Spread

The Bull Put spread is an intermediate strategy that can be profitable for stocks that are either range bound or rising.
The concept is to protect the downside of a Naked Put by buying a lower strike put to insure the one you sold.
Both put strikes should be lower than the current stock price so as to ensure a profit even if the stock doesn’t move at all.
The lower strike put that you buy is further OTM than the higher strike put that you sell. Therefore you receive a net credit
If the stock rises, both puts will expire worthless, and you simply retain the net credit.
If the stock falls, then your breakeven is the higher strike less the net credit you receive.
Provided the stock remains above that level, then you’ll make a profit. Your maximum loss is the difference in strikes less the net credit received.

Context - Bull Put Spread

Outlook

With bull puts, your outlook is bullish or neutral to bullish.

Rationale

To execute a bullish income trade for a net credit whilst reducing your maximum risk.

Net Position

This is a net credit trade because your bought puts will be cheaper than your sold puts , which are further out of the money

Effect of Time Decay

Time decay is helpful to this position when it is profitable and harmful when it is loss-making.
Remember, if you’re buying and selling OTM options to make a net credit

Time Period to Trade

It’s safest to trade this strategy on a short-term basis, preferably with one month or less to expiration.

Breakeven = (Higher strike – net credit)

Steps to Trading a Bull Put Spread

Steps In

Try to ensure that the trend is upward or range bound and identify a clear area of support.

Steps Out

Manage your position according to the rules defined in your Trading Plan.
If the stock falls below your stop loss, then buy back the short put or unravel the entire position.
If the stock remains above the higher strike put, the options will expire worthless, and you’ll retain the net credit.

Exiting the trade - Bull Put Spread

Advantages

Short-term income strategy not necessarily requiring any movement of the stock.
Capped downside protection compared to a Naked Put.

Disadvantages

Maximum loss is typically greater than the maximum gain, despite the capped downside.
High yielding trades tend to mean less protective cushion and are therefore riskier.
Capped upside if the stock rises.

Advantages and Disadvantages

Advantages

Short-term income strategy not necessarily requiring any movement of the stock.
Capped downside protection compared to a Naked Put.

Disadvantages

Maximum loss is typically greater than the maximum gain, despite the capped downside.
High yielding trades tend to mean less protective cushion and are therefore riskier.
Capped upside if the stock rises.

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