Bull Put Spread

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Bull Put Spread

A bull put spread is an options strategy that generates income with limited risk. It involves selling a put option at a higher strike price and buying another put at a lower strike price, both sharing the same expiration. The trader receives a net credit up front and profits if the underlying asset finishes above the higher strike at expiration.

How it works

  • Sell one put (higher strike, receive premium).
  • Buy one put (lower strike, pay premium).
  • Both options have the same expiration date.
  • Net credit = premium received from sold put − premium paid for bought put.

If the underlying is above the higher strike at expiration, both puts expire worthless and the trader keeps the net credit. If the underlying falls, the bought put limits losses below the lower strike.

Payoff and key formulas

Let K_short = higher (sold) strike, K_long = lower (bought) strike, and Credit = net credit received per share.

  • Maximum profit = Credit (per share) × contract size (usually 100 shares).
  • Maximum loss = (K_short − K_long − Credit) × contract size.
  • Break-even at expiration = K_short − Credit.

These outcomes assume standard American-style options where early assignment is possible.

Example

Assume 1 options contract (100 shares):
– Sell 1 put, strike $280, premium $8.50
– Buy 1 put, strike $270, premium $2.00
– Net credit = $8.50 − $2.00 = $6.50 → $650 total

Outcomes:
– If underlying ≥ $280 at expiration: both puts expire worthless → profit = $650 (max profit).
– If underlying ≤ $270 at expiration: maximum loss = ($280 − $270 − $6.50) × 100 = $350.
– Break-even = $280 − $6.50 = $273.50.

When to use

  • You are moderately bullish or expect the underlying to stay flat or slightly up through expiration.
  • You want immediate income with a known, capped downside.
  • Preferable in sideways or mildly rising markets.

Pros and cons

Pros:
– Generates up-front income (net credit).
– Downside risk is capped and known in advance.
– Typically requires less capital than an uncovered put sale because downside is limited.

Cons:
– Profit is limited to the initial credit; you miss large upside moves.
– Risk of early assignment for American options.
– Requires careful selection of strikes and expiration; margin and transaction costs apply.
– Performance can be affected by changes in implied volatility.

Trade construction and management tips

  • Choose strike width (K_short − K_long) to match risk tolerance; wider spreads increase potential loss but may pay higher credits.
  • Check option liquidity and bid-ask spreads to reduce execution cost.
  • Monitor implied volatility; increasing volatility typically widens put prices and can hurt a short put position.
  • Manage trades by closing, rolling (adjusting strikes/expiration), or accepting assignment depending on market conditions and capital goals.
  • Be aware of dividend and earnings dates that can prompt unexpected moves or early exercise.

How it differs from related strategies

  • Bull Call Spread: Uses calls (buy lower-strike call, sell higher-strike call). It requires a net debit and profits from upside price movement rather than collecting premium up front.
  • Covered Call: Involves owning the underlying and selling a call to earn premium. A covered call exposes you to stock ownership risk; a bull put spread requires no long stock position and limits downside within the strike spread.

Frequently asked questions

  • Can I lose more than the maximum loss?
    No. For a properly constructed bull put spread, the maximum loss is capped at (K_short − K_long − Credit) per share, excluding slippage and commissions.

  • What is the break-even formula?
    Break-even at expiration = K_short − Credit (per share).

  • Are bull put spreads suitable for beginners?
    They are relatively straightforward and limit downside, but beginners should understand early assignment risk, option Greeks, and margin rules before trading.

Conclusion

The bull put spread is a useful income-generating strategy for traders with a moderately bullish or neutral view. It offers immediate premium income and a defined worst-case loss, making it a practical tool to balance risk and reward in options portfolios when used with proper strike selection and trade management.