• Option basics
  • OptionSimple Book Store
  • Option definitions
    • Glossery of option terms
  • What is an option
  • Stock Option Pricing Models
    • Black-Scholes formula
• Bullish outlook
  • Long call
  • Short put
  • Bull call spread
  • Bull put spread
  • Secured put
  • Covered call
• Bearish outlook
  • Long put
  • Short call
  • Bear call spread
  • Bear put spread
• Neutral outlook
  • Long straddle
  • Short strangle
  • Long strangle
  • Butterfly spread
  • Calendar spread
• The Greeks
  • Black-Scholes option pricing model
  • Option Greek Delta
  • Option Greek Theta
  • Option Greek Vega
• resources-tools
  • Option strategy screener
  • Stock option calculator
  • Stock option learning games
  • Expiration calendar
  • CBOE television
  • DayTrader.com
  • The Options Industry Council
  • Option Clearing Corporation
  • Chicago Board Options Exchange
  • Market Watch
  • CNBC
  • Books

 

Bull put spread stock option trading strategy

 

What is a Bull put spread?

 

 

The bull put spread option trading strategy (credit spread) is a bullish option position in which a trader or investor may wish to initiate because he or she believes that there may be an increase in the underlying security.

 

The bull put spread is a popular option trading strategy and should only be implemented when fair consideration has been given to proper risk management.

 

The bull put spread option position consists of selling an at the money or out of the money put option contract and simultaneously purchasing a further out of the money option contract to reduce the risk of the short put option.

 

Maximum profit is the net credit received when initiating the position.

 

As long as the underlying stock is above the short strike at expiration the trader will keep the entire premium received from when the position was initiated.

 

The maximum loss on a Bull Put spread is realized when the stock expires below the long Put strike.

 

It is note worthy that without the long Put option in place, the risk would be much greater on the position. Considering all that would be left is a short Put option position. Buy attaching the long Put, not only is the risk greatly diminished but your margin requirement is significantly reduced to the difference between the long and short strikes, minus the credit received.

 

An important consideration when implementing the bull put spread option strategy is the effects that time decay and implied volatility can have on an option position. (Time decay is measured through Theta & Implied Volatility is measured through Vega).

 

The chart above is an illustration of the following example.--

 

~Sell 1 45 strike put @ $10.00 bid.

 

~Buy 1 35 strike put @ $5.00 ask.

 

~Total credit excluding commission=

$500.

 

~Break even point at expiration=

Upper strike (45.00)-

credit received ($5.00)=$40.00

 

~Maximum profit = credit received

 

~Maximum loss=difference between strikes - the net credit received = $500

 

 

This example illustrates you holding the bull put spread option position through the contracts expiration cycle.

 

Notice how your profits are capped to the net credit received, and the maximum loss on

 

Remember, without the long put in place the net credit would be much greater but the risk on the trade would be much higher.

 

There will always be trade-offs to make. The bull put spread option strategy offers very much opportunity. Through the proper risk management, knowing the reasons why you entered the trade, as well as your exit strategy, combined with the ability to make the necessary adjustments, one will be well on their way to trading the bull put spread option strategy successfully.