A bull put spread is a moderately bullish options strategy: you sell a put at a higher strike and buy a put at a lower strike on the same stock and expiration, and collect a net credit. Maximum profit is that credit, maximum loss is the strike difference minus the credit, and breakeven is the higher strike minus the credit per share. The MarketXLS bull put spread Excel template calculates all three from a ticker, expiry, strike, and spread width. This strategy involves limited profit and limited risk. It is pretty similar to the Bear call spread options strategy. The only difference between them is that we use put options in the Bull put spread options strategy.
Features of the bull put spread options strategy
- Buy a lower-strike put and sell a higher-strike put. In the example below, the bull put spread consists of one OTM put and one ITM put option. The options trader buys the OTM put with the lower strike price and sells the ITM put with the higher strike price. (Many traders sell an OTM put instead, which collects less premium but has more room.)
For example, currently, a stock is trading at $10. If the options trader uses a bull put spread options strategy, the trader will buy one put option at $7 and sell one put option at $12.
-Limited risk and limited profit strategyThe options trader will pay a premium for buying the OTM put option and receive a premium for selling the ITM put option. Because the premium received on the higher-strike put is larger, the trade opens for a net credit. That credit is the most the trader can make.
In case of a rise in market price, the trader keeps the net premium received, which is also the maximum profit.
Similarly, in case of a fall in market price, the trader’s loss is capped to the difference between the two strike prices minus the put options’ net premium.
###** Let us understand this strategy better with the help of a detailed example.The current share price of Tesla is trading at$680**. 1 Lot size is equivalent to 100 shares. To use the bull put spread options strategy, the options trader will:
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Buy 1 OTM Put Option at $650 (Premium = $2)
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Sell 1 ITM Put Option at $700 (Premium = $4)
** Note:** The premium, as shown above, is on a hypothetical basis.
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Premium Paid = $2* 100 = $200
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Premium Received = $4*100 = 400
Net Premium Received = $400 – $200 = $200
Now, let us consider three different scenarios to better understand the risk-reward ratio in this strategy: –
Scenario 1: Stock price remains unchanged at $680 (between the strikes). The $700 put you sold is $20 in the money and is exercised, costing $20 x 100 = $2,000. The $650 put you bought expires worthless. Result: $200 net premium minus $2,000 = a $1,800 loss.
Scenario 2: Stock price goes down to $620 (below the long put). Both puts are in the money. You lose $80 x 100 = $8,000 on the short $700 put and gain $30 x 100 = $3,000 on the long $650 put. Result: $200 + $3,000 minus $8,000 = a $4,800 loss, which is the maximum loss.
Scenario 3: Stock price increases to $710 (above the short put). Both options expire worthless and you keep the $200 net premium, which is the maximum profit.
Profit/loss in each scenario:
| Scenario | Price on Expiry | Profit/Loss |
|---|---|---|
| 1 | $680 | $200 – $2,000 = – $1,800 |
| 2 | $620 | $200 + $3,000 – $8,000 = – $4,800 |
| 3 | $710 | $200 |
Note: This is a hypothetical example. The profit/loss will vary with the premiums involved.
####** Maximum Profit, Loss, and Breakeven in Bull put spread options strategy**
The net premium received is the maximum profit under this strategy, earned when the stock closes at or above the higher (short) strike. In the example above, maximum profit is realized at any price equal to or above $700.
Breakeven is the short strike minus the net premium per share: $700 – $2 = $698 in the example above.
The maximum loss is capped at the higher strike minus the lower strike, times 100, minus the net premium. In the example above, Maximum Loss = ($700 – $650) x 100 – $200 = $4,800.
**How to use Bull put spread options strategy using MarketXLS?**MarketXLS is an Excel add-in with 1,000+ functions for stock and options analysis. Using a Bull put spread options strategy with the help of MarketXLS is quite simple. The user only needs to take the following steps in the template provided by MarketXLS:
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Mention Stock ticker
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Enter the Expiry date of the option. A list of upcoming expiry dates is provided adjacent to the input.
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Enter the OTM Strike Price
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Enter the spread (the difference between higher and lower strike prices)
Use the Bull Put Spread Option Strategy workbook to enter the inputs listed above and review the payoff results.
MarketXLS will make things easier for the trader by directly allowing them to observe the maximum profit and loss they would make using the bull put spread option strategy. MarketXLS would enable the trader to monitor the maximum profit and loss at different strike points, allowing him to choose the best strategy according to their requirements.
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###** Disclaimer:**
None of the content published on marketxls.com constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person.
The author is not offering any professional advice of any kind. The reader should consult a professional financial advisor to determine their suitability for any strategies discussed herein.
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