The options trader uses the bull put spread options strategy when having moderately bullish expectations on the market or stock. Under this strategy, the trader buys and sells the same asset’s put options with the same expiry date but with different strike prices. Also, 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 Bull put spread options strategy
- Buy OTM put and sell ITM put
A Bull put spread options strategy consists of one OTM put and one ITM put option. The options trader buys the OTM option with a higher strike price and sells the ITM options with a lower strike price.
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 strategy
The options trader will pay a premium for buying the OTM put option and receive a premium for selling the ITM put option. As the premium received on the selling the ITM put option is higher; the trader is already in profit at the beginning of the trade.
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:
- Buy 1 OTM Put Option at $650 (Premium = $2)
- Sell 1 ITM Put Option at $700 (Premium = $4)
Note: The premium, as shown above, is on a hypothetical basis.
- Premium Paid = $2* 100 = $200
- 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 (above long put)
The opposite party (seller) will exercise the buy ITM put option as he gets a higher price than the market. But the buy OTM put option will remain unexercised as the buyer would face a loss of $30.
Scenario 2: Stock price goes down to $620 (below long put)
As the strike price is higher than the current market price, both parties would exercise their options.
Scenario 3: Stock price increases to $710 (above short put)
Both options would expire worthless because the options trader would get a better price by selling the shares in the spot market.
Maximum Profit/Loss in all the scenarios is as given below:
|Scenario||Price on Expiry||Maximum Profit/Loss|
|1||$680||$200 – $200 = $0|
|2||$620||$200 + $300 – $800 = – $300|
Note: This is a hypothetical example. So, the maximum profit/loss may vary depending on the premium involved.
Maximum Profit, Loss, and Breakeven in Bull put spread options strategy
The net premium received by the investor is his maximum profit under this strategy. The investor would earn a profit when the option’s price remains equal to or more than the ITM put option strike price. Therefore, maximum profit is realized in the above case at any price equal to or above $700.
Breakeven would be achieved in the above example at $680, a price slightly above the OTM put option strike price.
The maximum loss of trader is capped to the upper strike price minus the lower strike price minus the net premium. In the above example, Maximum Loss = ($700-$650) *100 – $200 = $300.
How to use Bull put spread options strategy using MarketXLS?
MarketXLS is an excel based platform with 600+ 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:
- Mention Stock ticker
- Enter the Expiry date of the option. A list of upcoming expiry dates is provided adjacent to the input.
- Enter the OTM Strike Price
- Enter the spread (the difference between higher and lower strike prices)
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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