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Bull Put Spread Options Trading Strategy Explained

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

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Bull Put Spread

Bull Put Spread Options Strategy

Strategy LevelAdvance
Instruments TradedPut
Number of Positions2
Market ViewBullish
Risk ProfileLimited
Reward ProfileLimited
Breakeven PointStrike 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 ₹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.

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

Bull Call Spread of NIFTY
Current Nifty₹10,400
Strike Price of Short Put Option₹10,200
Option Lot Size75
Premium Received₹25
Strike Price of Buy Put Option₹10,000
Premium Paid₹10
Net Premium Received₹15
Break Even Point (Strike Price of short Put - Net Premium)₹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(₹)
9,70021750-35625-13875
9,9006750-20625-13875
10,100-750-5625-6375
10,185-7507500
10,300-75018751125
10,500-75018751125
10,700-75018751125
bull put spread strategy example nifty

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

Limited

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

Limited

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

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