This strategy entails buying and selling Put Options at different strike prices in order to achieve the desired outcome. Both the risk and the potential benefit for pursuing this course of action are low.
Simple Meaning would be “An investor applies the options technique known as a bull put spread when they believe that the price of the underlying asset will increase by a reasonable amount in the near future.”
It is also called “Bull Put Credit Spread”. The method utilizes two put options to establish a range, which consists of a high strike price and a low strike price. These are referred to as the high and low strike prices, respectively. The difference in the premiums that the two options have results in a credit that is given to the investor on a net basis.
- Bull Put Spreads: What You Need to Know
- To profit from falling stock prices, investors generally utilize put options since a put option offers them the option but not the responsibility to sell a stock at or before the contract's expiry date.
- An option's "strike price" determines how much the option is worth when it is exercised.
- There is a premium paid by investors for putting options.
- Is there a time to use the Bull Put Spread?
- If you are of the opinion that the price of a given underlying asset will either increase, move sideways, or slightly decrease, then this technique is one that you should consider using.
- Why should one use this strategy?
- In order to produce money despite volatile market conditions
- To obtain income from premiums.
- To purchase a stock at a price that is lower than its current market price
- In order to profit from markets that are trending further to slightly higher.
- Expenses and Gains Associated with Purchasing Put Options
- When investors are negative on a stock, they frequently buy put options, which means they are anticipating that the stock price will drop below the option's strike price.
- The bull put spread, on the other hand, is designed to profit from an increase in the price of a stock.
- If at the time of expiration the stock is trading at a price that is higher than the strike price, the put option is rendered worthless since no one would be willing to sell the stock at a price that is lower than the strike price.
- As a direct consequence of this, the investor who purchased the put will suffer a loss in the value of the premium that they initially paid.
- How to Make a Bull-Put Spreads
- The combination of two put options is known as a bull put spread. The first thing that an investor does is buy one put option and pays the premium associated with it.
- In addition, the investor receives a premium for selling a second put option with a higher strike price than the one they purchased.
- It is important to take note that the validity period for both choices will be the same.
- As long as the underlying price rises above the highest strike, neither option would be worth anything if it expired worthless.
- Therefore, the premium obtained from writing the spread would represent the greatest profit that might be made. A bull put spread can be used by investors who are confident in the long-term prospects of an underlying stock.
- Having said that, there is a possibility of suffering a loss when employing this method.
- Graphical Representation of Bull Put Spread- Moderately Bullish
Though, it is very technical concept, one needs to be aware of basic market terminologies of stock market to be able understand the initiate transaction or to understand theory. Let us try to draw the tentative chart of “Bull Put Spread Strategy” from the hypothetical data. The below example can also be taken into consideration if you want to understand the same from the data’s perspective.
Note: This is just a graphical representation of a bull call spread, to help you understand how its graph looks. It's only a supposition. You should not rely on them.
Bull Put Spread with an Example
Suppose, you sell some A-115 put at the high strike price of INR 4.2 and on the other hand you also buy some A-105 put at lowest strike price of INR 2.9, then the net credit amount for the same would be INR 1.3/-.
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