 Bull Put Spread Option Strategy
When the market is volatile and you are moderately
bullish on it, you might consider a Bull Put Spread. This
strategy involves selling a put option at one strike price
and buying a put on the same asset at a lower strike
price (further out-of-the-money). Usually both options will
have the same expiration date. This strategy is also
referred to as a Bullish Credit Spread.
This strategy has a profit/loss picture that is similar to a
Bull Call Spread, however in this case, there is a net
premium that goes into your trading account when you
establish the position, whereas with the Bull Call Spread,
you are paying out a premium when you establish the
position. Like the Bull Call Spread, this strategy has
limited risk but also limited profits.
This strategy is a bullish strategy, like selling naked
puts, that puts premium into your account when you
establish the position. However it limits your risk by the
purchase of lower priced puts, protecting you if the price
drops significantly.
With this strategy, your potential profit is limited to the
premium you collected for the puts you sold less
commissions and the premium you paid for the puts you
bought. Your potential losses are limited to the difference
between the strike prices multiplied by 100 times the
point value of the contract, less the cost of establishing
the position. An option calculator such as Option-Aid
performs these calculations for you instantaneously.
When we initiate a Bull Put Spread, the put we buy has
the same expiration date, with a lower strike price (at a
price point that we feel sufficiently limits our risk, without
significantly lowering the premium we are collecting.
It is also important to cover risks and caveats of this
strategy.
The risk of this position is limited and known as
described above. Remember that the commission you
pay for this position will be higher than the commission
for a straight option play, because you are initiating two
related option transactions.
When you initiate a Bull Put Spread, you are limiting
your upside potential. If the asset price rockets skyward,
then you aren't able to fully participate in that gain like
you would if you had purchased a call.
It is important to analyze your expectations for the
underlying asset and for the market before selecting your
strategy.
When you are analyzing potential option positions, it
helps to have a computer program like Option-Aid that
swiftly calculates volatility impacts, probabilities,
statistics, and other parameters of interest. These
programs can pay for themselves with the first trade that
they help you with.
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