Bull Put Spread

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DEFINITION of 'Bull Put Spread'

A type of 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'

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. 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.

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RELATED FAQS
  1. How do I set a strike price in an options spread?

    Options trading allows for a multitude of trading strategies, such as option spread strategies. Option spreads are created ... Read Full Answer >>
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    It seems counterintuitive that you would be able to profit from an increase in the price of an underlying asset by using ... Read Full Answer >>
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    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
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