Title: Bull put spread — clear guide for traders and students
What it is (short definition)
– A bull put spread is an options spread where you sell (write) a put option at a higher strike and buy a put option at a lower strike, both with the same expiration. Because you receive more premium from the short put than you pay for the long put, the position begins as a net credit. The strategy profits if the underlying stays above the higher (short) strike by expiration. It is also called a bull put credit spread.
Key terms (defined)
– Put option: a contract giving the holder the right — but not the obligation — to sell the underlying at the strike price before or at expiration.
– Strike price: the fixed price at which the option holder can exercise the option.
– Net credit: the cash received at trade initiation = premium received from the sold put minus premium paid for the bought put.
– Option writer (seller): the trader who sells an option and receives a premium; may be assigned if the option is exercised.
– Contract size: typically 100 shares per standard equity option contract.
Why traders use it
– Generate income with a bullish-to-neutral outlook.
– Limit downside exposure relative to selling an uncovered put outright, because the purchased put caps maximum loss.
– Known maximum profit and maximum loss at entry.
How profit and loss behave (formulas)
– Maximum profit = net credit received (per share). Per contract, multiply by 100.
– Maximum loss = (difference between strikes − net credit) × contract size.
– Break-even stock price at expiration = higher (short) strike − net credit.
Constructing the spread (step-by-step)
1. Choose expiration (time horizon) and strikes based on view and risk tolerance.
2. Sell a put at a higher strike (receive premium).
3. Buy a put at a lower strike with the same expiration (pay premium).
4. Confirm net credit and margin/assignment rules with your broker.
5. Monitor position; close or adjust before expiration if desired.
Checklist before placing the trade
– Confirm bullish-to-neutral outlook for the time until expiration.
– Verify liquidity (tight bid-ask spreads) for both option legs.
– Calculate net credit, max loss, and break-even.
– Ensure you understand assignment risk (short option can be exercised early).
– Check margin requirements and transaction/commissions.
– Have an exit plan for scenarios: unwind, roll, or let expire.
Worked numeric example (AAPL, illustrative)
Assumptions:
– Underlying: AAPL at $275 today.
– Strategy: sell 1 AAPL 270 put for $8.50, buy 1 AAPL 260 put for $2.00.
– Contract multiplier = 100 shares.
Step-by-step numbers:
– Premium received (short put) = $8.50 per share.
– Premium paid (long put) = $2.00 per share.
– Net credit = 8.50 − 2.00 = $6.50 per share → $650 per contract.
Outcomes at expiration:
1. Stock ≥ $270:
– Both puts expire worthless.
– You keep the net credit: profit = $6.50 × 100 = $650 (maximum profit).
2. Stock between $260 and $270:
– Short put is in-the-money; long put may offset part of loss.
– P/L per share = (stock price − short strike) + net credit (equivalently, loss grows as stock falls).
– Example: stock at $265
– Example: stock at $265 — Short 270 put is in-the-money by $5.00 (you would be obligated for $5.00 × 100 = $500 on the short put); the long 260 put is out-of-the-money and expires worthless. Net P/L per share = net credit − (short-put intrinsic) = 6.50 − 5.00 = +1.50 → $150 profit per contract.
3. Stock ≤ $260:
– Both puts are in-the-money. At expiration the short put loss = 270 − S and the long put gain = 260 − S. The position’s net
net P/L per share = net credit − (short‑put intrinsic − long‑put intrinsic). Because both puts have the same dependence on S, the S terms cancel and the position’s intrinsic loss is just the strike difference. Numerically:
– short put loss = 270 − S
– long put gain = 260 − S
– net intrinsic = (260 − S) − (270 − S) = −(270 − 260) = −10
So net P/L per share = net credit − 10 = 6.50 − 10 = −3.50 → −$350 per 100‑share contract.
Key summary (per share and per 1 contract = 100 shares)
– Maximum profit = net credit received = $6.50 per share → $650 per contract. This occurs when stock ≥ short strike at expiration (S ≥ 270).
– Maximum loss = strike width − net credit = (270 − 260) − 6.50 = 3.50 per share → $350 per contract. This occurs when stock ≤ long strike at expiration (S ≤ 260).
– Break‑even at expiration = short strike − net credit = 270 − 6.50 = $263.50 per share. At S = 263.50 you neither gain nor lose (ignoring commissions/fees).
Checklist for placing a bull‑put spread
1. Confirm bullish or neutral short‑term outlook for the underlying.
2. Select an expiration date and strike pair (short strike above long strike) that give a satisfactory net credit and acceptable max loss.
3. Compute: net credit, break‑even, max profit, max loss. Express per share and per contract.
4. Check margin/assignment rules with your broker — short put can be assigned any time (American options).
5. Enter the spread as a single order (sell higher strike put, buy lower strike put) to minimize leg risk.
6. Plan exit: close both legs, roll to a later expiration/strikes, or allow expiry if profitable and assignment risk acceptable.
Practical example (step‑by‑step)
– Underlying stock at $265.
– Sell 270 put for $8.50; buy 260 put for $2.00 → net credit = 8.50 − 2.00 = $6.50.
– Max profit = $6.50 × 100 = $650 (stock ≥ $270 at expiration).
– Break‑even = 270 − 6.50 = $263.50.
– Max loss = (270 − 260 − 6.50) × 100 = $350 (stock ≤ $260 at expiration).
Greeks and risk drivers (brief)
– Theta (time decay): generally helps the seller because option premiums lose value as time passes.
– Vega (volatility): rising implied volatility tends to widen option prices and can hurt a net short premium position; the bought put partially hedges vega exposure.
– Delta: the spread has a modest positive delta (bullish bias).
– Early assignment: possible for the short put if it is in the money before expiration; this can require taking on stock or managing the position immediately.
Pros and cons (concise)
– Pros: defined risk and reward; can generate income in sideways-to-bullish markets; cheaper margin than a naked short put.
– Cons: limited upside (profit capped at net credit); still subject to assignment risk; profit depends on premium collected versus potential strike gap.
Closing or managing the spread
– To close: buy back short put and sell the long put (simultaneous order preferred).
– To roll: buy to close current spread and sell/establish a new spread with later expiration or different strikes to extend duration or improve credit.
– If assigned on the short put: you may be exercised into a long stock position offset partly by the long put; evaluate closing or rolling immediately.
Assumptions and notes
– All numeric examples ignore commissions, fees, and bid/ask slippage.
– Options are typically quoted and settled per share; one standard equity option contract = 100 shares.
– The above assumes American‑style options (common for US equities), where early exercise and assignment are possible.
Educational disclaimer
This explanation is for educational purposes only and is not individualized investment advice. Consider transaction costs, tax treatment, and your risk tolerance before trading options. Consult a qualified professional for personal advice.
Sources
– Cboe — Vertical Spread Basics: https://www.cboe.com/strategies/vertical-spread
– Options Clearing Corporation — Options Education: https://www.optionseducation.org
– U.S. Securities and Exchange Commission — Options:
https://www.investor.gov/introduction-investing/investing-basics/derivatives/options
– Investopedia — Bull Put Spread: https://www.investopedia.com/terms/b/bullputspread.asp
– Cboe — Vertical Spread Basics: https://www.cboe.com/strategies/vertical-spread
– Options Clearing Corporation — Options Education: https://www.optionseducation.org