The bull put spread technique is utilized when we thinks that the price of underlying asset will go up moderately in near term. If you think the price will rise a lot, I suggest do not use this strategy. There are much better strategy for that condition. It is implemented by selling an in-the-dollars (ITM) put choice (has higher price) and purchasing an out-of-the-money (OTM) put alternative (has lower price) on the same underlying stock with the same expiration date. Bull put spread has limited profit and risk. This sort of strategy is known as credit spread where you will get income when entering the position. The quantity received by selling higher strike put alternative is higher than the price of purchasing put with lower strike.
To comprehend much better, here’s an example. Stock XYZ is trading at , and we believe it is going to rally soon moderately, so we enter a bull put spread by buying a September 35 put for and writes a September 45 put for . Thus, we receives a net credit of when entering this position.
If XYZ begins to rise and closes at on expiration date, both possibilities expire worthless and we keep the entire credit of as profit. This is the maximum profit you can get.
If XYZ decline to , both choices expire in-the-funds. The September 35 call will have an intrinsic value of and the September 45 call will have an intrinsic value of . This means that the position is now worth at expiration or loss. Since we had received a credit of when entered the spread, our net loss comes to . This is the maximum loss you can have.
The above example did not take commission charges for straightforward understanding. But you need to know the profit and loss also depends on the commission from your brokerage.
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