What is Bull Put Spread?

There exist various option spread strategies like vertical and diagonal spreads used by investors. Bull put spread is one of them. It is a vertical spread strategy, and an example of credit spread diminishing the risk of an option position. Another name for this strategy is known as short put spread or credit put spread.

Key Takeaways

  • A bull put spread is an options trading strategy involving buying a put option at a lower strike price and selling another put option at a higher price.Both put options have the same underlying asset and expiration date.Bullish traders usually use it to benefit from the moderate rise in the price movement.The maximum gain in this strategy is the net premium received. The maximum loss is the difference between strike prices of puts minus the net premium received, and the breakeven point is the difference between the upper strike price and net premium received.

Bull Put Spread Option Strategy Explained

The bull put spread strategy is a vertical spread strategy exampling the formation of a range exhibiting two different strike pricesStrike PricesExercise price or strike price refers to the price at which the underlying stock is purchased or sold by the persons trading in the options of calls & puts available in the derivative trading. Thus, the exercise price is a term used in the derivative market.read more expiring on the same date. Hence it is also a two-leg spread strategy. It is primarily practiced when the specific stock depicts or has a potential for moderate bullish behavior in the stock market. It benefits investors by upfront profit.

The proceeds from selling the put optionsPut OptionsPut Option is a financial instrument that gives the buyer the right to sell the option anytime before the date of contract expiration at a pre-specified price called strike price. It protects the underlying asset from any downfall of the underlying asset anticipated.read more offset the premium required for buying the other put option hence resulting in a net credit. The net premium from this points to the maximum gain. The strategy caps profit and loss at a particular level, limiting the risk and return.

Examples of other close concepts are the bull call spread, bear call spread, and bear put spread. Bull put spread vs. bull call spread implies that both are opposite concepts pointing to the type of option purchased. Bull call spread involves the buying and selling of call optionsCall OptionsA call option is a financial contract that permits but does not obligate a buyer to purchase an underlying asset at a predetermined (strike) price within a specific period (expiration).read more. Traders use bear call spread to benefit from the underlying asset’sUnderlying Asset’sUnderlying assets are the actual financial assets on which the financial derivatives rely. Thus, any change in the value of a derivative reflects the price fluctuation of its underlying asset. Such assets comprise stocks, commodities, market indices, bonds, currencies and interest rates.read more price decline. It consists of selling (at a lower price) and buying (at a higher price) a call option. There are instances of investors simultaneously using both these strategies, like in the case of the iron condor strategy. Bear put involves buying a put option at a higher price and selling a put option at a lower price.

How to Construct Bull Put Spread?

The investor deals with two put options to construct a short put spread. First, the investor buys a put option and sells another put option, both having the same underlying stock and expiration date, but the put option sold will have a higher strike price than the put option brought. This two-leg spread strategy is executed by selling the ITM put option (In the MoneyIn The MoneyThe term “in the money” refers to an option that, if exercised, will result in a profit. It varies depending on whether the option is a call or a put. A call option is “in the money” when the strike price of the underlying asset is less than the market price. A put option is “in the money” when the strike price of the underlying asset is more than the market price.read more) and purchasing OTM (Out of the MoneyOut Of The Money”Out of the money” is the term used in options trading & can be described as an option contract that has no intrinsic value if exercised today. In simple terms, such options trade below the value of an underlying asset and therefore, only have time value.read more) put option of the same stock with the same expiration date.

Breakeven of Bull Put Spread

Let’s look into some of the important formulas to get the breakeven concept:

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Bull Put Spread (wallstreetmojo.com)

For better understanding, consider a simple example of bull put spread.

Consider a stock that currently trades at $100 per share. The investor:

  • Sells one put option with a strike price of $110 (short put) expiring in one month, receiving a premium of $20.Buys one put option with a strike price of $90 (long put) expiring in one month, paying a premium of $10. Long put is mainly for protection purposes.Note: One equity option contract generally represents 100 shares of the underlying stock.Net premium= $20-$10= $10Maximum profit: Net premium received = $10Here the range formed is (110-90): if the stock price reaches 110 or above, there would be no gain or loss; the profit is capped at a net premium. For instance, if the stock price reaches 120, there would be no gain or loss, and the net gain is the premium of $20. On the other hand, if the stock price falls to 90 or below, the investor loss is capped at $10 since both put options are in the money (ITM). Maximum loss = (Strike price of short put – Strike price of a long put) – Net premium received = $110 – $90 – 10 = $10Breakeven point =Upper strike price – Net premium received = $110 – $10 = $100

This has been a Guide to What is Bull Put Spread & its Definition. We explain the bull put spread strategy, its examples, and comparison with the bull call spread. You can learn more about it from the following articles –

It involves updates in strategies to maintain a good position. For example, if the underlying asset price is falling, the traders can execute an opposing bear call credit spread above the put spread to develop an iron condo strategy. Traders use bear call spread to benefit from the underlying asset’s price decline. It involves the selling (at a lower price) and buying (at a higher price) of a call option. Furthermore, traders can form iron butterfly strategies if the decrease is substantial.

Both strategies manifest a limited risk and reward profile. However, a short put spread is a credit spread providing upfront profit payment, whereas a bull call spread (debit bull spread) is an example of a debit spread.

If the underlying asset price is greater than the short put option at expiration, both put options will expire, and the net premium is treated as the profit.

  • Writing Call OptionsNaked callNaked Put