Bull Put Spread
Candlefocus EditorTo execute a bull put spread, an investor will purchase an in-the-money put option, with a lower strike price, and simultaneously write a further out-of-the money put option, with a higher strike price. This creates a spread of the two put different options.
In creating a bull put spread, the investor will generally receive a net credit as the sales premiums of the two puts is greater than the purchase price of the in-the-money put. This will form the maximum profit potential.
The maximum loss from the strategy is equal to the difference in strike price (between the two put options) less the net credit. That is, if the stock closes below the lower strike price at the expiration date, the investor will incur the above maximum loss.
To profit from a bull put spread, the stock must be above the higher strike price at expiration. If this is the case, the investor will keep the net credit generated in the spread.
In summary, a bull put spread is a useful strategy to take advantage of a moderate increase in the price of the underlying security while limiting risk. By paying the premium for the long put option, the investor is able to protect against downside losses; while at the same time writing a put option for a higher strike price, thus generating a net credit. As long as the stock price closes above the higher strike price on expiration, the investor will be able to keep the premiums generated in the spread and make a profit.