Options Trading Strategies Bull Put Spread

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Options Trading Strategies

Bull Put Spread

The bull put spread is a fairly complex bullish options trading strategy, despite only requiring two transactions. It requires a high trading level, so it isn't really ideal for beginners.

Bull Put Spread option trading strategy is used by a trader who is bullish in nature and expects the underlying asset to move in an upward trend in the near future.

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This strategy includes buying of an ‘Out of the Money’ Put Option and selling of ‘In the Money’ Put Option of the same underlying asset and the same expiration date. When you write a Put, you will receive premium thereby engulfing the cost for buying of OTM Put Option. This strategy is also called as ‘Bull Put Credit Spread’ as your account gets credited while deploying the strategy.

The Bull Call Spread, the Bull Put Spread is a two leg option strategy invoked when the view on the market is ‘moderately bullish’.

Bull Call spread is executed for a debit; the bull put spread is executed for a credit.

And you have a moderately bullish outlook looking ahead, and then it makes sense to invoke a Bull Put Spread for a net credit as opposed to invoking a Bull Call Spread for a net debit.

There are two main benefits of this spread. First, assuming you write at the money puts when applying the strategy, you will still make a profit even if the underlying security fails to go up in price. Although the puts you own will expire worthless, so will the ones that have written and you therefore get to keep the entire upfront credit.

The bull put spread is a good choice of strategy for traders that are looking to make a relatively quick profit from a small increase in the price of a security. Although profits are limited, so are losses, and as such it's an appropriate strategy if you have concerns that the security could possibly fall in price instead.

Break-even: Break-even price at expiration is strike price of Put Sell (ITM) - the net credit received.

Risk: Limited

Reward: Limited, maximum potential profit is limited to the net credit received.

Action

Buy 1 ‘Out of the Money’ Put Option

Sell 1 ‘In the Money’ Put Option

Bull Put Spread Example

Suppose that the NIFTY is trading around 11400 level and Mr. G enters into Bull-Put-Spread strategy. Lot Size of NIFTY is 75.

Mr G sells one 11500 ITM Put Option for Rs. 250 and buy one 11200 OTM Put Option for a premium of Rs. 105. Hence his account will be credited by Rs. 10,875. [(250-105)*75].

Here’s a look at the payout diagram at expiration with results.