Bull Put Spread
Put Credit Spread
A Bull Put Spread is a two-part strategy where one simultaneously sells a put option and buys another put option with the same expiration date and underlier but with different strike prices. The name derives from the fact that the strategy performs well when the underlying goes up.
- Directional strategy
- Consists of simultaneously selling a put option and purchasing a put option at a lower price
- Different strike prices, same expiry date
A typical Bull Put Spread consists of selling (writing) an ITM put option and then buying an OTM put option to partially cover margin requirements and limit the potential losses on the position.
When the position is opened, the premium received from writing the option is more than the premium paid for the long option, resulting in a premium credited (added) to the trader's account when the position is entered.
This comes with the liability of potentially paying off part or all of the strike spread. For example, if you have a bull put spread with a long put at a strike of $100 and a short put with a strike of $110, you could be on the hook for at most $10 at expiration.
Because of this liability, these strategies require collateral to be posted. For many retail investors, this requirement is the full strike spread amount. In the example, that would be $10. This collateral, net of any liability payout, is returned by expiration.
Example: Suppose the current price of Bitcoin is $17,000. We would sell an ATM put with a strike price of K1 = $17,000 and an expiration date of Dec 30, 2022. In this example, we are selling an ATM put and buying an OTM put with a lower strike price.
- Sell ATM put with the exact strike price
- Buy OTM put with a lower strike price
Premium Earned: $1014
However, we want to minimize our losses, so we simultaneously buy a put with a lower strike price of K2 = $16,000 and the same expiration date as the ATM put.
Cost of premium: -$388
Breakeven point = $16,374
Potential max profit for a put credit spread equals the net premium you receive. $1014 - $388 = $626
Potential max loss equals the difference between the strike spread minus the net premium. K1 - K2 - p = 1000 - 626 = 374
A bull put spread is an options strategy where you buy a put option with a lower strike while short-selling a put option with a higher strike price, both with the same expiration. As its name insinuates, it performs well when the underlying asset increases.
Compared to short-selling a put, a bull put spread offers downside protection at the cost of more premium. It is also closely related to a bull call spread, and deviations from their relationship can represent arbitrage opportunities.