Bull Put Spread

A Bull Put Spread position is created by selling an Out Of The Money Put Option and buying a protective Long Put Option. The Short (or sold) side is closer to the money than the Long (bought) Put Option, the difference between both strike prices is the spread (hence the name) and a credit is received because one option is sold for more than the other costs. An alternative term for this strategy is Bullish Credit Spread.

Bull Put Spreads benefit when the price of the Underlying rises because the Short Put Option reduces in value. Even if the price of the Underlying does not rise, providing the Strike Price of the Short option is below the market price then it expires worthless and the Option Writer keeps all the Premium taken in when the put was sold. For this reason, Bull Put Spreads are sometimes referred to as having slightly non-directional characteristics.

A Bull put Credit Spread is the inverse or opposite strategy to a Bear Call Spread but shares some characteristics with it. Bull Put Spread benefits from declining Volatility and time decay (Theta) is positive for Bull put Spreads.



See the Profit & Loss diagram of the Bull Put Spread Spread strategy at OptionCreator

Example

XYZ is currently trading at $200

Short 1 x Out Of The Money $190 Strike Put for 4.14 = $414 credit
Long 1 x Out Of The Money $180 Strike Put for 1.66 = ($166) debit

Net credit received = $248

All options expire with XYZ still trading above $190

Short 1 x $190 Strike Put is worthless = ($0)
Long 1 x $180 Strike Put is worthless = ($0)

The trader keeps the $248 credit received. This is the total amount of profit available, irrespective of whether the price had risen any higher.

Options expire with XYZ trading at $180

Short 1 x $190 Strike Put is now worth 10 = ($1000) debit
Long 1 x $180 Strike Put is now worth 0 = $0credit

The trader incurs a loss of $1000 which is offset by the credit received of $248 to reduce the liability to (-$752). This is the total amount the trader can lose.