What is Bull Put Spread Option Strategy?

A bull put spread is a bullish options strategy used when you expect the underlying asset to rise moderately or remain stable. It involves selling a put option at a higher strike price and buying another put option at a lower strike price with the same expiry.

• The strategy uses two put options with different strike prices.
• The higher-strike put is sold, while the lower-strike put is bought.
• The difference between the premiums creates a net credit.
• The net credit received is the maximum possible profit.
• The maximum loss is limited to the difference between the strike prices minus the net credit.

A bull put spread is an options strategy used when a trader has a moderately bullish outlook on an underlying asset. The trader generally expects the price to rise slightly or remain stable.

The strategy involves two put options on the same underlying asset and with the same expiration date.

• Sell a put with a higher strike price.
• Buy a put with a lower strike price.

The premium received from the short put is usually higher than the premium paid for the long put. This creates a net credit when the position is opened.

The strategy has both limited profit and limited loss. Higher volatility can affect option premiums and the value of both positions, so its impact depends on the option prices and market conditions.

A bull put spread is created by buying and selling put options with different strike prices but the same expiration date.

Step I: Sell a put option

• Sell a put option with the higher strike price.
• Receive a premium for selling the option.
• By selling the put, you take on the obligation associated with the option if it is exercised or assigned.

Step II: Buy a put option

• Buy a put option with a lower strike price.
• Pay a premium for buying the option.
• The long put limits the potential loss if the underlying asset falls sharply.

For example, if you sell a put at a ₹140 strike price and buy another put at a ₹130 strike price, you have created a bull put spread with a ₹10 strike-price difference.

A bull put spread normally creates a net credit because the premium received from selling the higher-strike put is greater than the premium paid for buying the lower-strike put.

The net credit represents the maximum potential profit from the strategy. It is the difference between the premium received and the premium paid.

The net credit is generated through the options transactions. Holding a demat account does not itself create the credit.

The maximum profit is earned if the underlying asset closes at or above the higher strike price, which is the strike price of the short put, at expiration. In this situation, both puts expire out-of-the-money.

Losses can occur when the underlying price falls below the higher strike price. The maximum loss is reached if the price falls to or below the lower strike price.

The maximum loss remains limited to the difference between the two strike prices minus the net credit received.

Consider a hypothetical stock called ABC Ltd. with the following details:

Step I: Buy put option (long put)

The trader buys 1 ABC Ltd. put option with a strike price of ₹130.

• Premium paid per share: ₹5
• Contract size: 100 shares
• Total premium paid: ₹500

Step II: Sell put option (short put)

The trader sells 1 ABC Ltd. put option with a strike price of ₹140.

• Premium received per share: ₹10
• Contract size: 100 shares
• Total premium received: ₹1,000

The net credit received

The ₹500 net credit is the maximum potential profit from this example.

The difference between the two strike prices is ₹10 per share. For 100 shares, the total strike-price difference is ₹1,000.

Therefore:

• Maximum profit: ₹500
• Maximum loss: ₹1,000 minus ₹500 = ₹500

Scenario I: When the CMP of ABC Ltd. closes above ₹140 at expiry (profitability)

If ABC Ltd. closes above ₹140 at expiry, both puts expire out-of-the-money.

The ₹140 short put and the ₹130 long put expire worthless. The trader keeps the net credit received when the position was opened.

• Net credit: ₹500
• Maximum profit: ₹500

Scenario II: When the CMP of ABC Ltd. closes below ₹140 but above ₹130 at expiry (limited loss)

If ABC Ltd. closes below ₹140 but above ₹130, the ₹140 short put is in-the-money. The ₹130 long put remains out-of-the-money and expires worthless.

The result depends on how far the share price has fallen below ₹140. The initial ₹500 net credit offsets part or all of the loss on the short put.

For example:

• Expiry price: ₹132
• Short put loss: ₹8 per share, or ₹800 for 100 shares
• Net credit received: ₹500
• Net loss: ₹300

If the price falls to ₹130 or below, the maximum loss is limited because gains on the ₹130 long put offset further losses on the ₹140 short put.

A bull put spread is a moderately bullish options strategy in which you sell a higher-strike put and buy a lower-strike put with the same expiry. The strategy creates a net credit, which is also its maximum potential profit.

The maximum loss is limited to the difference between the two strike prices minus the net credit received. The strategy generally benefits when the underlying asset stays stable or rises and finishes at or above the short put strike at expiry.