Bull Put Spread

What Is a Bull Put Spread?

A bull put spread is an options strategy that an investor utilizes when they expect a moderate rise in the price of the underlying asset. The strategy utilizes two put options to form a reach, comprising of a high strike price and a low strike price. The investor gets a net credit from the difference between the premiums of the two options.

Understanding a Bull Put Spread

Investors commonly utilize put options to profit from declines in a stock's price, since a put option gives them the capacity — however not the commitment — to sell a stock at or before the expiration date of the contract. Each put option has a strike price, which is the price at which the option converts to the underlying stock. Investors pay a premium to purchase a put option.

Profits and Loss from Put Options

Investors commonly buy put options when they are bearish on a stock, meaning they hope the stock will fall below the option's strike price. Nonetheless, the bull put spread is intended to benefit from a stock's rise. In the event that the stock trades over the strike at expiry, the put option lapses worthless, on the grounds that nobody would sell the stock at a strike lower than the market price. Accordingly, the investor who bought the put loses the value of the premium they paid.

Then again, an investor who sells a put option is trusting the stock doesn't diminish yet rather rises over the strike so the put option terminates worthless. A put option seller — the option writer — gets the premium for selling the option initially and needs to keep that sum. In any case, on the off chance that the stock declines below the strike, the put seller is on the hook. The option holder has a profit and will exercise their rights, selling their shares at the higher strike price. All in all, the put option is exercised against the seller.

The premium received by the seller would be discounted relying upon how far the stock price falls below the put option's strike. The bull put spread is intended to allow the seller to keep the premium earned from selling the put option even assuming the stock's price declines.

Construction of the Bull Put Spread

A bull put spread comprises of two put options. Initial, an investor buys one put option and pays a premium. Simultaneously, the investor sells a second put option with a strike price that is higher than the one they purchased, getting a premium for that sale. Note that the two options will have a similar expiration date. Since puts lose value as the underlying increments, the two options would lapse worthless in the event that the underlying price completes higher than the highest strike. Subsequently, the maximum profit would be the premium received from composing the spread.

The individuals who are bullish on an underlying stock could in this manner utilize a bull put spread to create income with limited downside. Notwithstanding, there is a risk of loss with this strategy.

Bull Put Profit and Loss

The maximum profit for a bull put spread is equivalent to the difference between the amount received from the sold put and the amount paid for the purchased put. At the end of the day, the net credit received initially is the maximum profit, which possibly occurs assuming the stock's price closes over the higher strike price at expiry.

The goal of the bull put spread strategy is realized when the price of the underlying moves or stays over the higher strike price. The outcome is the sold option terminates worthless. The explanation it terminates worthless is that nobody would need to exercise it and sell their shares at the strike price assuming it's lower than the market price.

A drawback to the strategy is that it limits the profit earned in the event that the stock rises well over the upper strike price of the sold put option. The investor would pocket the initial credit yet pass up any future gains.

On the off chance that the stock is below the upper strike in the strategy, the investor will start to lose money since the put option will probably be exercised. Somebody in the market would need to sell their shares at this, more alluring, strike price.

Notwithstanding, the investor received a net credit for the strategy at the start. This credit gives a cushion to the losses. When the stock declines far to the point of clearing out the credit received, the investor starts losing money on the trade.

On the off chance that the stock price falls below the lower strike put option — the purchased put — both put options would have lost money, and maximum loss for the strategy is realized. The maximum loss is equivalent to the difference between the strike prices and the net credit received.

Suppose an investor is bullish on Apple (AAPL) throughout the next month. Envision the stock as of now trades at $275 per share. To carry out a bull put spread, the investor:

1. Sells for $8.50 one put option with a strike of $280 terminating in one month
2. Buys for $2 one put option with a strike of $270 terminating in one month

The investor earns a net credit of $6.50 for the two options, or $8.50 credit - $2 premium paid. Since one options contract equals 100 shares of the underlying asset, the total credit received is $650.

Scenario 1 Maximum Profit

Suppose Apple rises and trades at $300 at expiry. The maximum profit is accomplished and equals $650, or $8.50 - $2 = $6.50 x 100 shares = $650. When the stock rises over the upper strike price, the strategy fails to earn any extra profit.

Scenario 2 Maximum Loss

Assuming that Apple trades at $200 per share or below the low strike, the maximum loss is realized. Nonetheless, the loss is capped at $350, or $280 put - $270 put - ($8.50 - $2) x 100 shares.

Preferably, the investor is searching for the stock to close above $280 per share on expiration, which would be the place where maximum profit is accomplished.

Remedy Dec. 24, 2021. A video in this article mistakenly named the diagrams for Bull Put Spreads and Bear Put Spreads.

Highlights

• The maximum loss is equivalent to the difference between the strike prices and the net credit received.
• An investor executes a bull put spread by buying a put option on a security and selling one more put option for a similar date yet a higher strike price.
• The maximum profit is the difference in the premium costs of the two put options. This possibly happens assuming the stock's price closes over the higher strike price at expiry.
• A bull put spread is an options strategy that is utilized when the investor anticipates a moderate rise in the price of the underlying asset.