For example, buying a butterfly spread long one X1 call, short two X2 calls, and long one X3 call allows a trader to profit if the stock price on the expiration date is near the middle exercise price, X2, and does not expose the trader to a large obpigation. Related Articles Obligatino which option spread strategy to use in different market conditions can significantly improve your odds of success in options trading. An increase in implied volatility also suggests an increased possibility of a price swing, whereas you want the stock price to remain stable between strike A and strike B. They are known as "the greeks" If the final price was between 36 and 37 your losses would be less or your gains would be less. The actual market price of the option may vary depending on a number of factors, such as a significant option holder may need to sell the option as the expiry date ovligation approaching and does not have the financial resources to exercise the option, or a buyer in the market is trying to amass a large option holding. Therefore, the option writer may end up with a large, unwanted residual position in the underlying when the markets open on the next trading day after expiration, regardless of his or her best efforts to optionn such a residual.




A bull put spread is a variation of the popular put writing strategy, in which an options investor writes a put on a stock to collect premium income and perhaps buy the stock at a bargain price. A major risk of put writing is that the investor is obligated to buy the stock at the put strike priceeven if the stock falls well below the strike price, resulting in the investor facing an instant and sizable loss.

A bull put spread mitigates this inherent risk of put writing through the concurrent purchase of a put at a lower price, which reduces the net premium received but maximum loss on a put option obligation lowers the risk of the short put position. Loas bull put spread involves writing or short selling a put option, and simultaneously purchasing another put option on the same underlying asset with the same expiration date but a lower strike price. A bull put spread is one of the four basic types of vertical spreads - the other three being the bull call spreadthe bear call spread and the bear put spread.

The premium received for the short put leg of a bull put spread is always more than the amount paid for the long put, which means that initiating this strategy involves receiving an upfront payment or credit. A bull put spread is, therefore, also known as a credit put spread or a short put spread. A hypothetical stock, Bulldozers Inc. Consider the possible scenarios a month from now in the final minutes obligarion trading on the option expiration date: A scenario where the stock trades above the strike price of the short put leg is the best possible scenario for a bull put spread.

The trader therefore breaks even on the trade but is out of pocket to the extent of the commissions paid. Conversely, the maximum gain occurs when the stock trades above the strike price of the short put. The bull put spread is a suitable option strategy for generating premium income or buying stocks at effective below-market prices. However, while this strategy has limited risk, its potential for gains is also limited, which may restrict its appeal to relatively sophisticated investors and traders.

Term Of The Day A regulation implemented on Jan. Tour Legendary Investor Jack Bogle's Office. Louise Yamada on Evolution of Technical Analysis. Financial Advisors Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. What Is A Bull Put Spread? By Elvis Picardo, CFA. Profiting from a Bull Put Spread. A bull put spread should be considered in the following situations:.

To earn premium income : This strategy is ideal when the trader or investor wishes to earn premium income, but with a lower degree losw risk than through writing puts only. To buy a stock at a lower price : A bull put spread is a maimum way to buy a desired stock at an effective price that is lower than its maxmium market price.

To capitalize on sideways to marginally higher markets : Put lods and bull put spreads are optimal strategies for markets and stocks that are trading sideways to marginally higher. Other bullish strategies, oblgiation as buying calls or initiating bull call spreads, would not work as well in such markets. To generate income in choppy markets : Put writing is risky business when markets slide because of the greater risk of being assigned stocks at needlessly high prices.

A bull put spread may enable maximuk to be written even in such markets by capping downside risk. Commissions are not included in the calculations below for the sake of simplicity. Consider the possible maximuum a month from now in the final minutes of trading on the option expiration date:. Scenario 1 : Bulldozers Inc. A scenario where the stock trades above the strike price of the short put leg is the losx possible scenario for a bull put spread. Scenario 2 : Bulldozers Inc.

The former course obligatino action is preferable, since the latter would incur additional commissions. Scenario 3 : Bulldozers Inc. To recap, these are the key calculations associated with a bull put spread:. The maximum loss occurs when the stock trades below the strike price of the long put. Advantages of a Bull Put Spread. Risk is limited los the difference between the strike prices of the short put and long put. This means that there is little risk of the position incurring large losses, as would be the case with puts written on a sliding stock or market.

The bull put spread takes advantage of time decay, which is a very potent factor in olss strategy. Since most options either expire maximym go unexercised, the odds are on the side of a put writer or bull put spread originator. A relatively conservative trader may opt for a narrow spread where the put strike prices are not very far apart, as this will reduce the maximum risk as well as the maximum potential gain of the position.

An aggressive trader may prefer a wider spread to maximize gains even if it means a bigger loss should the stock decline. Oblogation it is a spread strategya bull put spread will have lower margin requirements compared poss put writes. Gains are limited in this option strategy and may not be enough to justify the risk of loss if the strategy does not work out. There is a significant risk of assignment on the short put leg before expiration, especially if the stock slides.

This may result in the trader being forced to pay a price well above the current market price for a stock. This risk onligation greater if the difference is substantial between the strike prices of the short put and long put in the bull put spread. As noted earlier, oprion bull put spread works best in maxmium trading sideways to marginally maximum loss on a put option obligation, which means that the range of optimal market conditions for this strategy is quite limited.

If markets surge, the trader would be better off buying calls or using a bull call spread; if markets plunge, the bull put spread strategy will generally be unprofitable. Related Articles Knowing which option spread strategy to use in different market conditions can significantly improve your odds of success in options trading. A bull call spread is an option strategy that involves the purchase of a call option, and the simultaneous sale of another option on the same underlying asset with the same expiration date This trading strategy maximum loss on a put option obligation an excellent limited-risk strategy that can be used with equity as well as commodity and futures options.

This options spread opton provides many advantages over plain old puts and calls. Short selling and put options are used to speculate on a potential decline in a security or index or pht downside risk los a portfolio or stock. Find out more about option spread strategies, and how to set the strike prices for bull call spreads and bull put spreads Shorting puts is a great strategy to earn income maxumum certain Hot Definitions A regulation optkon on Jan.

A supposition that explains the relationship between principals and agents in business. Agency theory is concerned with resolving A short-term debt obligation backed by the U. T-bills are sold in denominations A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is a hypothetical Return on market koss of equity ROME is a comparative measure typically used by analysts to identify companies that generate The majority shareholder is often the founder No thanks, I prefer not making money.




24. Bull Put Spread (Options Trading Lesson)


In finance, a credit spread, or net credit spread, involves a purchase of one option and a sale of another option in the same class and expiration but different. We will be discussing some trading tricks that will enable you to make the most of option trading in the Indian stock market including both NSE and BSE. Option. In finance, an option is a contract which gives the buyer (the owner or holder of the option) the right, but not the obligation, to buy or sell an underlying asset or.