What is Bull Put Spread Option Strategy?

• A Bull Put Spread option strategy, also known as a "short put spread," is a strategy that involves selling a put option at a higher strike price and buying a put option at a lower strike price with the same expiration date (Mostly ITM and ATM Respectively). This creates a spread where the maximum potential profit is limited to the premium received from selling the higher strike price minus premium paid for buying lower strike price, and the maximum potential loss is limited to the difference between the strike prices minus the premium received.
  
  This strategy is considered a bullish strategy because it profits when the price of the underlying price increase. If the price of the underlying rises above the strike price of the short put option, both options will expire worthless, and the investor will keep the premium received as profit. If the price of the underlying security falls above the strike price of the long put option leg, the investor will lose money, but the loss will be limited to the difference between the strike prices minus the premium received.

When to Execute Bull Put Spread Option Strategy?

• A Bull Put Spread option strategy is executed when an investor expects the price of the underlying security to increase. If the investor expects the market to increase, they can use a bull Put Spread strategy to profit from the increasing while limiting their potential loss.

What is the Trade?

• A Bull Put Spread consists of one short put with a higher strike price and one long put with a lower strike price. Both calls have the same underlying stock and the same expiration date.

Breakeven for Bull Call Spread

• Breakeven point = Sold Put Strike Price - net premium received.

What will be maximum profit?

• Maximum reward is limited to the difference between two strikes i.e., net capital inflow. Trader will earn maximum profit when the underlying closes above the sold strike price as both option will become OTM and expires worthless, trader will keep the net credit.

What will be maximum loss?

• Maximum risk is the difference between both the strikes minus credit inflow received initially. Maximum loss arises when stock closes below lower Strike put. This is net credit strategy so in any circumstances loss will be limited also in implied volatility.

What are the advantages?

• Limited risk: The maximum potential loss is limited to the difference between the strike prices of the put options minus the premium received for selling the higher strike price option.
  Reduced cost: Bull Put Spread is the limited risk and limited reward strategy which incurs less margin.
  Reduced volatility: Since the strategy involves both buying and selling options, it can help to reduce the overall volatility of a portfolio.
  Bull put strategy is good for when trader is moderately bullish about the market during option trading.

What are the disadvantages?

• Bull Put Spread maximum potential profit is limited to the difference between the strike prices of the put options minus the premium paid for the lower strike price. Since the options have the same expiration date, the strategy can only be implemented for a specific time period and may not be suitable for longer-term market movements.
  Limited earning potential: The earning potential is limited because it's a directional strategy which include one long option and one short option trading.

Example for Bull Put Spread:

• An example of a bear call spread would be as follows:
  
  An investor believes that the price of Nifty will increase in the next week and trading at 17925.
  He purchases a Put option with a strike price of 18000 for a premium of 200.
  He also sells a Put option with a strike price of 18300 for a premium of 400.
  The expiration date for both options is in one week.
  If the price of Nifty stock increases to or above 18300 at expiration, both options will expire worthless, and the investor will have a profit of 200 points i.e., 10000.
  If the price of Nifty stock decreases to or below 18000 at expiration will resulting in a loss of 100 i.e.5000.

Impact of Delta on Bull Put Spread

• The impact of delta on a bear call spread can be summarized as follows:
  As the underlying asset's price increase, the bull put spread will make a profit while the underlying asset's price decrease, the bull put spread strategy will make a loss. The delta of the options will change as the underlying asset's price changes, which will impact the profit or loss of the strategy.

Impact of time on Bull Put Spread

• Since a bull put spread strategy is made up of one short call and one long call, the sensitivity to time erosion depends on the relationship of the stock price to the strike prices of the spread.
  Theta has a negligible effect on bull put spread as this is net credit strategy the loss of theta is known since inception of the strategy, bull put spread strategy is mostly affected by delta as it a directional strategy.

Impact of Volatility on Bull Put Spread

• Since a Bull Put Spread consists of one short call and one long call, the price of a Bull Put Spread changes very little when volatility changes and other factors remain constant. Vega also have negligible effect on bear call spread.