What is a 'Bull Put Spread'

A bull put spread is an options strategy that is used when the investor expects a moderate rise in the price of the underlying asset. This strategy is constructed by purchasing one put option while simultaneously selling another put option with a higher strike price. The goal of this strategy is realized when the price of the underlying stays above the higher strike price, which causes the short option to expire worthless, resulting in the trader keeping the premium.

BREAKING DOWN 'Bull Put Spread'

In a bull put spread, the investor is obligated to purchase the underlying stock at the higher strike price if the short put option is exercised. Additionally, if exercising the long put option is favorable, the investor has the right to sell the underlying stock at the lower strike price. This type of strategy (buying one option and selling another with a higher strike price) is known as a credit spread, because the amount received by selling the put option with a higher strike is more than enough to cover the cost of purchasing the put with the lower strike.

Profit and Loss

The bull put spread strategy has limited risk, but it has a limited profit potential. Investors who are bullish on an underlying stock could use a bull put spread to generate income with limited downside. The maximum possible profit using this strategy is equal to the difference between the amount received from the short put and the amount used to pay for the long put. The maximum loss a trader can incur when using this strategy is equal to the difference between the strike prices and the net credit received. Bull put spreads can be created with in-the-money or out-of-the-money put options, all with the same expiration date.

Bull Put Spread Example

Assume an investor is bullish on hypothetical stock TJM over the next two weeks, but the investor does not have enough capital to purchase shares of the stock. The stock is currently trading at $60 per share. Consequently, the investor implements a bull put spread by writing five put options with a strike price of $65 for $8.25 and purchasing five put options with a strike price of $55 for $1.50, which are expire in two weeks.

Therefore, the investor's maximum profit is limited to $3,375, or ($8.25 - $1.50) * 5 * 100, since equity options typically have a multiplier of 100. The investor's maximum loss is capped at $1,625, or ($65 - $55 - ($8.25 - $1.50)) * 5 * 100. Therefore, the investor is looking the stock to close above $65 per share on the expiration, which would be the point the maximum profit is achieved.

RELATED TERMS
  1. Bear Spread

    1. An option strategy seeking maximum profit when the price of ...
  2. Bear Put Spread

    A type of options strategy used when an option trader expects ...
  3. Bull Spread

    An option strategy in which maximum profit is attained if the ...
  4. Short Put

    A type of strategy regarding a put option, which is a contract ...
  5. Bull Call Spread

    An options strategy that involves purchasing call options at ...
  6. Long Put

    An options strategy in which a put option is purchased as a speculative ...
Related Articles
  1. Trading

    What Is A Bull Put Spread?

    Investopedia explains: A bull put spread is a variation of the popular put writing strategy, in which an options investor writes a put on a stock to collect premium income and perhaps buy the ...
  2. Trading

    Bear Put Spreads: A Roaring Alternative To Short Selling

    This strategy allows you to stop chasing losses when you're feeling bearish.
  3. Trading

    Profiting From Stock Declines: Bear Put Spread Vs. Long Put

    If you're bearish, you should compare the risk/reward characteristics of these two strategies.
  4. Trading

    Three Ways to Profit Using Put Options

    A brief overview of how to profit from using put options in your portfolio.
  5. Trading

    Get Familiar with These 6 Option Strategies

    When you’re ready to move beyond the basics of investing, it’s time to learn your options.
  6. Trading

    What is a Bear Put Spread?

    A bear put spread entails the purchase of a put option and the simultaneous sale of another put with the same expiration but a lower strike price.
  7. Trading

    How To Manage A Bull Call Spread

    A bull call spread, also called a vertical spread, involves buying a call option at a specific strike price and simultaneously selling another call option at a higher strike price.
  8. Managing Wealth

    Practical And Affordable Hedging Strategies

    Learn how to find and use the most cost-effective ways to transfer risk.
  9. Trading

    Which Vertical Option Spread Should You Use?

    Knowing which option spread strategy to use in different market conditions can significantly improve your odds of success in options trading.
  10. Trading

    Understanding Bull Spread Option Strategies

    Bull spread option strategies, such as a bull call spread strategy, are hedging strategies for traders to take a bullish view while reducing risk.
RELATED FAQS
  1. How do I set a strike price in an options spread?

    Find out more about option spread strategies, and how to set the strike prices for bull call spreads and bull put spreads ... Read Answer >>
  2. How do traders combine a short put with other positions to hedge?

    Learn how sold puts can be utilized in different types of hedging strategies, and understand some of the more common option ... Read Answer >>
  3. Can I make money using put options when prices are going up?

    It seems counterintuitive that you would be able to profit from an increase in the price of an underlying asset by using ... Read Answer >>
  4. How do I set a strike price in a put?

    Learn about put options, considerations to make before you select strike prices and how to select strike prices for your ... Read Answer >>
  5. When is a put option considered to be "in the money"?

    Learn about put options, what they are, how these financial derivatives operate and when put options are considered to be ... Read Answer >>
  6. What techniques are most useful for hedging exposure to the telecommunications sector?

    Learn about option strategies used to hedge a long stock position in the telecommunications sector, including bear put spreads ... Read Answer >>
Hot Definitions
  1. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  2. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  3. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  4. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  5. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  6. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
Trading Center