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 writing another put option with a higher strike price. The combination results in the trader receiving a credit or income from the premium received. The goal of this strategy is realized when the price of the underlying moves or stays above the higher strike price. This causes the written option to expire worthless, resulting in the trader keeping the premium. The risk of the strategy is limited by the bought put option.

Breaking Down the 'Bull Put Spread'

A bull put spread obliges an investor to purchase the underlying stock at the higher strike price if the written 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 is known as a credit spread because the amount received from 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 also 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 written 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. Both options have the same expiration date.

Bull Put Spread Example

Assume an investor is bullish on hypothetical stock XYZ over the next month. The stock is currently trading at $275 per share. Consequently, the investor implements a bull put spread by writing one put option with a strike price of $280 for $8.50 and purchasing one put option with a strike price of $270 for $2, which both expire in one month.

The investor's maximum profit is limited to $650, or ($8.50 - $2) x 1 contract x 100 shares. The investor's maximum loss is capped at $350, or ($280 - $270 - ($8.50 - $2)) x 1 contract x 100 shares. Therefore, the investor is looking for the stock to close above $280 per share on the expiration, which would be the point the maximum profit is achieved.

RELATED TERMS
  1. Bear Put Spread

    A bear put spread is a bearish options strategy used to profit ...
  2. Short Put

    A short put is when a put trade is opened by writing the option.
  3. Put Option

    A put options gives the owner the right to sell a specified amount ...
  4. Strike Price

    Strike price is the price at which the underlying asset of a ...
  5. Protective Put

    A protective put is a risk-management strategy that investors ...
  6. Naked Put

    A naked put is an options strategy in which the investor writes ...
Related Articles
  1. Trading

    What Is A Bull Put Spread?

    In a bull put spread, the options trader writes a put on a security to collect premium income and perhaps buy the security at a bargain price.
  2. Trading

    What is a Bull Call Spread?

    A bull call spread is an option strategy that involves the purchase of a call option and the simultaneous sale of another option.
  3. Trading

    Beginners Guide To Options Strategies

    Find out four simple ways to profit from call and put options strategies.
  4. Trading

    Option trading strategies: A guide for beginners

    Options offer alternative strategies for investors to profit from trading underlying securities. Learn about the four basic option strategies for beginners.
  5. Trading

    Options Strategies for Your Portfolio to Make Money Regularly

    Discover the option-writing strategies that can deliver consistent income, including the use of put options instead of limit orders, and maximizing premiums.
  6. Managing Wealth

    Practical And Affordable Hedging Strategies

    Hedging offers a cost-effective way to transfer risk.
  7. Trading

    When Should I Sell A Put Option Vs A Call Option?

    Beginning traders often ask not when they should buy options, but rather, when they should sell them.
  8. Trading

    Pencil in Profits in Any Market With a Calendar Spread

    Calendar spreads are a great way to combine the advantages of spreads and directional option trades in the same position.
  9. Investing

    Taking Advantage of Volatility Spikes

    Learn how options traders can follow the strategy of using volatility spikes with put credit spreads to improve their chances of investing success.
  10. Trading

    The Butterfly Spread

    A butterfly spread is a neutral options strategy with both limited risk and limited profit potential. The strategy involves four options contracts with the same expiration month but with three ...
RELATED FAQS
  1. When is a put option considered to be 'in the money?'

    Learn about put options, how these financial derivatives work, and when put options are considered to be in the money related ... Read Answer >>
  2. What is index option trading and how does it work?

    Learn about stock index options, including differences between single stock options and index options, and understand different ... Read Answer >>
  3. When does one sell a put option, and when does one sell a call option?

    An investor would sell a put option if her outlook on the underlying was bullish, and would sell a call option if her outlook ... Read Answer >>
  4. What occurs when a security meets its strike price?

    Learn more about the moneyness of stock options and what happens when the underlying security's price reaches the option ... Read Answer >>
Trading Center