Bull Put Credit Spread (Vertical Bull Puts) Investor Sentiment:
Moderate Bullish Strategy (Large Credit Spread): It's considered a bullish strategy because you profit if the underlying stock price increases.
Profit Potential:
This strategy requires the investor to sell in-the-money (higher) put options and buy out-of-the-money (lower) put options on the same stock with the same expiration date. This is also known as a vertical bull put spread. If the stock price closes above the in-the-money (higher) put option strike price on the expiration date, then the investor receives the maximum profit.
Risks:
If the stock price decreases below the out-of-the-money (lower) put option strike price at the expiration date, then the investor has a maximum loss potential of the difference between the two put option strike prices minus the net credit.
Drawbacks:
Lower risk than strictly buying a put options, but limited profit potential. Break-even at upper strike price minus net credit. Maximum profit potential if stock increases above the in-the-money (higher) put option strike price. Similar to a Bear Call Spread, this strategy is a credit spread position. The credit is the amount that the in-the-money sell option position brings in more than it costs to purchase the out-of-the-money option.
Profit / Loss Summary:
Net Credit = Money received from selling in-the-money (ITM) put option - Money paid for buying out-of-the-money (OTM) put option
Maximum Profit Potential = Net Credit Received
Maximum Loss Potential = Difference Between Strike Prices - Net Credit Received
Bull Put Spread Introduction
The Bull Put Spread strategy requires the investor to buy out-of-the-money (lower) strike price put options while simultaneously selling in-the-money (higher) strike price put options on the same underlying stock. A Bull Put Spread strategy is profitable when the stock price moves above it's break-even point: the upper strike price minus net credit. A characteristic of the vertical Bull Put Spread is that the put options are sold and bought on the same underlying stock with the same expiration date (this is why it's known as a "vertical spread"). calloptionputoption.com "Bull Put Spread" data focuses on bull put spread plays that are vertical in nature. The benefit of the Bull Put Spread strategy is the risk never exceeds the net investment of buying and selling put options simultaneously. This strategy is considered moderately bullish because the investor is using the the sale of a put to reduce his/her risk while still positioning for a decent profit should the stock price move above the in-the-money (higher) put option strike price. The maximum loss potential is reached if the stock price moves below the out-of-the-money (lower) put option strike price. Because of the hedging involved by selling the ITM put option in combination with buying an OTM put option, this method is less risky than strictly buying a put option.
Definition - Credit Spread Position
A Bull Put Spread is the purchase of an OTM (lower) put option while simultaneously selling an ITM (higher) put option on the same underlying stock. There are more aggressive and less aggressive Bull Put Spread positions, but calloptionputoption.com "Bull Put Spread" data looks for plays where one put option position (leg) is in-the-money and the other leg is out-of-the-money on the same underlying stock with the same option expiration date. That is, there is one strike price above the stock price and one below. This applies to both call option and put option spread strategies at calloptionputoption.com. Because the sale of the ITM (higher) strike price brings in more cash flow than the cost of purchasing the OTM (lower) strike price put option, it is considered a "Credit Spread". To emphasize, if a spread position takes in more through the sale of one put option position than it costs to purchase the other put option position, it is a credit spread.&n bsp; If the opposite were true, that is the put buy position costs more than the sale put position, this is known as a "Debit Spread". A Bull Put Spread position is always considered a credit spread because the purchase of the OTM (lower) put strike price costs less than is received for the sell premium of the ITM (higher) put option.
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