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Bull Put Spread Option Strategy

Bull Put Spread Option Strategy

What is Bull Put Spread Option Strategy?

  • Bull Put Spread is a limited risk to limited reward strategy. Bull Put Spread is a moderate Bullish strategy as we expect underlying rise in the near term, Bull Put spread is net credit strategy as we are buying the lower strike Put and Selling the higher strike Put. We have bought a Lower put to neutralise the effect of short Put in the case of sharp rise.

When to Execute?

  • Bull Put spread is executed when we have bullish outlook in Stock/ Index in near term. Instead of buying naked calls with higher outflow, one sells higher strike calls to fully fund the outflow resulting in hedged strategy. Identifying clear uptrend is essential for the strategy, specifically can be implemented on breakout which helps to get the momentum, on the other hand risk is limited and will not hurt much if breakout fails to materialise. Ideal scenario to execute bull put spread is when we are expecting gradual rise in price till the sold strike price, then both the strike become zero.

What is the Trade?

  • Buy one lot (At-The-Money) ATM Call and Sell one lot In-the-Money (ITM) PE.Both the put should be of the same underlying and expiration

Breakeven for Bull Call Spread

  • Breakeven point = Sold strike – Net Premium Spread

What will be maximum profit?

  • Maximum reward is limited to the difference between two strikes i.e., net capital inflow. Maximum Profit arises if the stock closes at or above the higher strike put resulting in both the strike ending worthless and you pocket the entire initial inflow.

What will be maximum loss?

  • Maximum risk is the difference between both the strikes less credit inflow received initially. Maximum loss arises when stock closes below lower strike put.

What are the advantages?

  • Helps to generate sustain income if the view goes correct. Can be used to repair loss making Long Put by selling higher ITM put. Develop Limited risk, limited reward strategy.

What are the disadvantages?

  • Identifying clear areas of support and resistance is essential. If the stock closes below the lower strike put, one can lose money.

Example for Bull Put Spread:

  • Nifty future price is 15500. A Bull Put Spread can be devised by adding one lot of 15500 Put At-the-Money (ATM) @100 and selling one lot of 15800 PE (ITM) @ 300. Net Premium Paid or Received = Rs. (+200). Maximum profit above 15800 i.e., +300-100 =200. i.e., difference between 15800-15500 = 300 – 100 (net premium received). Maximum Loss = -100