Bull Put Spread Option Trading Strategy Explained

Published on Wednesday, April 18, 2018 | Modified on Wednesday, June 5, 2019

Bull Put Spread Options Strategy

Strategy Level	Advance
Instruments Traded	Put
Number of Positions	2
Market View	Bullish
Risk Profile	Limited
Reward Profile	Limited
Breakeven Point	Strike price of short put - net premium paid

A Bull Put Spread (or Bull Put Credit Spread) strategy is a Bullish strategy to be used when you're expecting the price of the underlying instrument to mildly rise or be less volatile. The strategy involves buying a Put Option and selling a Put Option at different strike prices. The risk and reward for this strategy is limited.

A Bull Put Strategy involves Buy OTM Put Option and Sell ITM Put Option. For example, If you are of the view that the price of Reliance Shares will moderately gain or drop its volatility in near future. If Reliance is currently trading at Rs 600 then you will buy an OTM Put Option at Rs 700 and a sell an ITM Put Option at Rs 550. You will make a profit when, at expiry, Reliance closes at Rs 700 level and incur losses if the prices fall down below the current price.

When to use Bull Put Spread strategy?

This strategy works well when you're of the view that the price of a particular underlying will rise, move sideways, or marginally fall.

Example

Suppose the Nifty is trading at Rs 10,400. This strategy is implemented by selling a Nifty Put option with a strike price of Rs 10,200 at a premium of Rs 25 and buying a OTM Nifty Put option with a strike price Rs 10,000 at a premium of Rs 10.

**Bull Call Spread of NIFTY**
Current Nifty	Rs 10,400
Strike Price of Short Put Option	Rs 10,200
Option Lot Size	75
Premium Received	Rs 25
Strike Price of Buy Put Option	Rs 10,000
Premium Paid	Rs 10
Net Premium Received	Rs 15
Break Even Point (Strike Price of short Put - Net Premium)	Rs 10,185

Bull Put Spread Strategy Pay-off Schedule

Nifty on Expiry(CP)	Long Put Option PayOff=BEP-CP BEP=9990 MAX LOSS=750	Short Put Option PayOff=CP-BEP BEP=10175 MAX PROFIT=1875	Net Payoff(Rs )
9,700	21750	-35625	-13875
9,900	6750	-20625	-13875
10,100	-750	-5625	-6375
10,185	-750	750	0
10,300	-750	1875	1125
10,500	-750	1875	1125
10,700	-750	1875	1125

Market View - Bullish

When you are expecting a moderate rise in the price of the underlying or less volatility.

Actions

Buy OTM Put Option
Sell ITM Put Option

A Bull Put Strategy involves Buy OTM Put Option + Sell ITM Put Option.

For example, If you are of the view that the price of Reliance Shares will moderately gain or drop its volatility in near future. If Reliance is currently trading at 600 then you will buy a OTM PUT OPTION at 700 and a sell a ITM PUT OPTION at 550. You will make a profit when at expiry Reliance closes at 700 level and incur losses if the prices fall down below the current price.

Breakeven Point

Strike price of short put - net premium paid

Risk Profile of Bull Put Spread

Maximum loss occurs when the stock price moves below the lower strike price on expiration date.

Max Loss = (Strike Price Put 1 - Strike Price of Put 2) - Net Premium Received

Max Loss Occurs When Price of Underlying <= Strike Price of Long Put

Reward Profile of Bull Put Spread

Maximum profit happens when the price of the underlying moves above the strike price of Short Put on expiration date.

Max Profit = Net Premium Received

Max Profit Scenario of Bull Put Spread

Both options unexercised

Max Loss Scenario of Bull Put Spread

Both options exercised

Advantage of Bull Put Spread

Allows you to benefit from time decay in profit situations. Helps you profit from 3 scenarios: rise, sideway movements and marginal fall of the underlying.

Disadvantage of Bull Put Spread

Limited profit. Time decay may go against you in loss situations.

How to exit?

Wait for options to expire and retain the premium received
Buy back the short Put options and sell the bought put options

Simillar Strategies

Bull Call Spread, Bear Put Spread, Collar

5 Comments

5. Ankur Choudhary

| Link|January 15, 2021 4:49:24 PMReply

wrong examples, please check, you are miss leading the viewers.

5.1. Jetsticks

| Link|December 19, 2022 6:33:18 PM

I’m not sure these people know what they’re talking about.

4. KANNAN

| Link|November 3, 2021 6:04:06 PMReply

YES THIS IS CORRECT STRIKES (SELL10600 AND BUY 10200), CHITTORGARH .COM IS NOT UPDATED YET.

3. Nitesh Waghela

| Link|July 10, 2021 12:25:24 AMReply

I believe your Nifty OTM and ITM option is incorrect.
CMP - 10400, in case of PUT option;
ITM will be - 10600 (sell)
OTM will be 10200 (buy)
So if market goes up, Premium of 10600 will decrease leading shortsell to earn profit and 10200 PE will increase. Recheck.

3.1. KANNAN

| Link|November 3, 2021 5:08:41 PM

YES, THIS IS CORRECT STRIKES CHITTORGARH.COM IS NOT UPDATED YET.

3.2. KANNAN

| Link|November 3, 2021 6:01:08 PM

YES THIS IS CORRECT STRIKES, CHITTORGARH .COM IS NOT UPDATED YET.

2. vijay

| Link|March 18, 2021 6:10:23 AMReply

i am new to trading concepts..but i think this example is right. The examples is laid given that the underlying value is bullish, so the ITM and OTM references are correct !!

1. Lois

| Link|October 31, 2020 3:32:22 PMReply

A Bull Put Strategy involves Buy OTM Put Option and Sell ITM Put Option. For example, If you are of the view that the price of Reliance Shares will moderately gain or drop its volatility in near future. If Reliance is currently trading at ₹600 then you will buy an OTM Put Option at ₹700 and a sell an ITM Put Option at ₹550. You will make a profit when, at expiry, Reliance closes at ₹700 level and incur losses if the prices fall down below the current price.

I find this example incorrect. It should be selling put option at 700 and buy Put option at 550. Isn't it?

1.1. Keshav

| Link|January 26, 2021 1:48:17 PM

Your r right, I also found this example wrong...