Bull Put Spread
The Bull Put spread is an intermediate
strategy that can be profitable for stocks that are either range bound or
rising. The strategy is to buy a put and at the same time sell a put with a
higher strike price.
Both put strikes should be lower than the
current stock price so as to ensure a profit even if the stock does not move.
The lower strike put that you buy is further out-of-the-money than the higher
strike put that you sell. Therefore you receive a net credit because you buy a
cheaper option than the one you sell, which highlights that options are cheaper
the further out-of-the-money you go.
If the stock rises, both puts will expire
worthless, and you simply retain the net credit. If the stock falls, then your
break even is the higher strike less the net credit you receive. Provided the
stock remains above that level, then you will make a profit. Otherwise you
could experience a loss. Your maximum loss is the difference in strikes less
the net credit received.
Bullish or neutral to bullish.
you are looking for income and have a bullish outlook on a stock, while
limiting downside risk.
investor believes that stock XXXX, trading at $20, is going to rise soon, and
enters into a bull put spread. The investor earns a net credit. The price of
the stock rises, and on expiration of the options (which expire worthless) the
investor keeps the credit, which is the maximum amount of profit possible.
is trading at $20.00 on April 15, 2011.
the May 2011 20 strike put for $0.50.
the May 2011 25 strike put for $1.00.
credit=premium sold minus premium bought ($1.00 - 0.50 = 0.50)
is a short term strategy that does not require movement of the stock. It also
has capped downside protection.
is the credit/income from sold puts minus bought puts. The risk is the
difference between the strike prices minus your net credit.
in strikes minus net credit.
strike minus net credit.
effect when this position is profitable and negative when it is in a loss position.
The nearer you get to expiration, the higher your loss.
investor may wish to unravel this position partially, leg by leg, leaving one
leg exposed in an attempt to make a profit.
the position. Buy back the puts sold and sell the puts bought.