Bull Put Spread Options Strategy
Strategy Level: Advanced
Instruments Traded: Put
Number of Positions: 2
Market View: Bullish
Risk Profile: Limited
Reward Profile: Limited
The Bull Put Spread (or Bull Put Credit Spread) is a bullish strategy that you can employ when you expect the price of an underlying instrument to rise slightly or exhibit less volatility. This strategy involves buying a Put Option and simultaneously selling a Put Option with different strike prices, resulting in a limited risk-reward scenario.
Bull Put Spread Strategy: Buying OTM Put Options and Selling ITM Put Options
The Bull Put Spread strategy is executed by buying Out-of-The-Money (OTM) Put Options and simultaneously selling In-The-Money (ITM) Put Options.
Let’s designate it as Reliance for our discourse, are poised to undergo a moderate augmentation in market volatility or perhaps a contraction thereof, all while the prevailing valuation stands at a commendable Rs. 620, you might consider the strategic maneuver of procuring an Out-of-The-Money (OTM) Put Option, featuring a designated strike price of Rs. 700. In tandem with this, you could also contemplate engaging in the sale of an In-The-Money (ITM) Put Option, one characterized by a stipulated strike price of Rs. 600. Should the final moments of expiration witness Reliance’s valuation culminating at a commendable Rs. 700, the fruits of prosperity shall undoubtedly grace your endeavors. Nevertheless, it is incumbent upon me to elucidate that any dip in valuations beneath the watermark of Rs. 620 upon the precipice of expiration shall usher forth an unwelcome harbinger of fiscal setback.
When to Use the Bull Put Spread Strategy
This strategy is useful when you believe that a certain underlying price will either rise, remain flat, or slightly fall.
Bull Put Spread of NIFTY – An Example
- Current Nifty: Rs. 15,000
- Strike price of Short Put Option: Rs. 14,500
- Lot Size: 75
- Premium Received: Rs 30
- Buy Put Option Strike Price: Rs. 14,000
- Premium Paid: Rs 15
- Net Premium Received: Rs 15
- Breakeven Point: Rs 14,485 (Strike price of short put – Net premium)
Bull Put Spread Strategy Payoff Schedule
| Nifty on Expiry (CP) | Long Put Option (PayOff=BEP-CP) | Short Put Option (PayOff=CP-BEP) | Net Payoff (Rs) |
|---|---|---|---|
| 14,500 | 22,500 | -15,000 | -2,500 |
| 14,700 | 7,500 | -15,000 | -7,500 |
| 14,900 | -7,500 | -7,500 | -15,000 |
| 14,985 | -7,500 | 15 | -7,485 |
| 15,100 | -7,500 | 100 | -7,400 |
| 15,300 | -7,500 | 300 | -7,200 |
| 15,500 | -7,500 | 500 | -7,000 |
Market View – Bullish
The Bull Put Spread Strategy is suitable if you expect a moderate increase in the price or less volatility.
Bull Put Spread: Risk Profile
The risk profile of the Bull Put Spread is limited. The maximum loss occurs when the stock price falls below the lower strike price on the expiration date.
Max Loss = Strike Price Put 2 – Strike Price of Put 1
The maximum loss happens when the Strike Price of the Long-Put is equal to the Price of the Underlying.
Bull Put Spread: Reward Profile
The reward profile of the Bull Put Spread is limited. The maximum profit is made when the price of the underlying rises above the strike of the Short Put at the expiration date.
Max Profit = Net Premium Received
Bull Put Spread Scenario with Maximum Profit
The Bull Put Spread results in maximum profit when both options remain unexercised.
Bull Put Spread Scenario with Maximum Loss
The strategy leads to maximum loss when both options are exercised.
Advantages of Bull Put Spreads
Bull Put Spreads allow you to benefit from the time decay and profit from scenarios like sideways movements, marginal falls, and rises.
Disadvantage of Bull Put Spreads
The profit potential is limited, and time decay may go against you in loss situations.
How to Exit the Bull Put Spread Strategy
You can retain the premium if you wait for your options to expire or sell the put options you initially bought and buy back the short Put option.
