Bull Put Spread Strategy: Definition, How to Trade it (2024)

FAQs

Bull Put Spread Strategy: Definition, How to Trade it? ›

A bull put spread involves selling one put option while buying another at a lower strike price, both with the same expiration date. This strategy allows traders to benefit from a stock's upward movement or simply remaining stable while limiting the risk of losses.

A bull put spread involves writing or short selling a put option, and simultaneously purchasing another put option (on the same underlying asset) with the same expiration date but a lower strike price.

How Do You Make Money on a Put Credit Spread? You make money on a put credit spread by collecting a net premium from selling a put with a higher strike price (thus a higher premium) and buying a put with a lower strike price.

A Bull Put Spread has a higher probability of making money as compared to Bull Call Spread. The probability of making money is 67% because Bull Put Spread will be profitable even if the underlying assets holds steady or rise.

A put credit spread is an options strategy that includes a pre-defined risk and reward, meaning the investor sets a maximum profit and a maximum loss before executing the trade. To execute the strategy, the investor sells the put, then buys a lower strike put within the same order.

A bull call spread strategy profits when the price of the underlying asset rises. If the price of the underlying asset rises significantly and is above the strike price of the short call option at expiration, the strategy reaches its maximum profit.

Second, if both options are out of the money, you can consider letting both legs expire worthless, achieving maximum profit. Depending on your specific risk and return objectives, you may want to consider closing both legs of the spread before expiration, once your profit goals are reached.

Spread trading – also known as relative value trading – is the simultaneous buying and selling of related securities as a unit, designed to profit from a change in the spread (price difference) between the two securities.

BUY a PUT one or more strikes below #1 PUT in the same month, this provides the downside safety. The margin requirement is the difference between the strike prices, usually 5 points/dollars. The maximum risk is the difference between the strike prices, less the net credit (difference in premiums).

Spread strategy such as the 'Bull Call Spread' is best implemented when your outlook on the stock/index is 'moderate' and not really 'aggressive'. For example the outlook on a particular stock could be 'moderately bullish' or 'moderately bearish'.

What is an example of a bull spread option strategy? ›

Example of a Bull Spread

The trader purchases one two-month SPX 4400 call for a price of $33.75, and at the same time sells one two-month SPX 4405 call and receives $30.50. The total net debit for the spread is $33.50 – $30.75 = $2.75 x 100 contract multiplier = $275.00.

The disadvantage is that the premium received is smaller, the higher the short call's strike price. It is interesting to compare this strategy to the bull put spread. The profit/loss payoff profiles are exactly the same, once adjusted for the net cost to carry.

Advantages of a Bull Call Spread

Risk is limited to the net premium paid for the position. There is no risk of runaway losses unless the trader closes the long call position - leaving the short call position open - and the security subsequently rises.

A bull put spread involves purchasing an out-of-the-money (OTM) put option and selling an in-the-money (ITM) put option with a higher strike price but with the same underlying asset and expiration date. A bull put spread should only be used when the market is exhibiting an upward trend.

A bull call spread is exited by selling-to-close (STC) the long call option and buying-to-close (BTC) the short call option. If the spread is sold for more than it was purchased, a profit will be realized.

The basics of the bull ratio spread are that you buy calls and also write calls with a higher strike price. However, it's not quite that simple. The strategy is known as a ratio spread, because the transactions involve a ratio of calls written to those bought i.e. you write a higher number than you buy.

Currently, the bull put spread shows a margin requirement of just 42k on sensibull. Its a bit tricky, so for example if both legs go ITM, then you need maximum margin. Even the Buy Leg will require delivery margin on expiry day(50%). Both legs will block almost full value of lot size delivery margin.

Hedging a Bull Call Debit Spread

To hedge the bull call spread, purchase a bear put debit spread at the same strike price and expiration as the bull call spread. This would create a long butterfly and allow the position to profit if the underlying price continues to decline.