Investment Type: Credit
Strike Prices: ITM/ATM/OTM for sold leg, OTM for bought leg
Expiration Month: Same expiration month between sold leg and bought leg, preferably current month
Composition: Buy put + Sell put
| Bull Put Spread Profile Chart | ||
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Bull Put Spread is another form of Credit Spread but with bullish expectation. The main thing to look at for this strategy is that we make sure that we receive a net credit. We Sell higher strike Put and Buy lower strike Put in the process.
If we choose OTM Put for the sold leg, then we will have more cushion but our reward will be severely capped and in most cases lower than our risks. If we choose ITM Put for the sold leg, we substitute cushion with a better risk/reward ratio, and we need to have stronger bullish outlook.
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Entry:
Investment @ Entry = (Premium of Sold Leg x No of Contracts x 100 Shares) + (Premium of Bought Leg x No of Contracts x 100 Shares) = ($7,650) + $2,700 = Credit ($4,950)
Breakeven Point = Strike Price of Sold Leg – Net Credit = $35.00 - $1.10 = $33.90
Exit: Best Case Scenario:
Profit @ Exit = (Premium of Sold Leg x No of Contracts x 100 Shares) + (Premium of Bought Leg x No of Contracts x 100 Shares) - Investment @ Entry = $ 0 + $ 0 – ($4,950) = $4,950
Return of Investment = Profit @ Exit / Investment @ Entry = 100%
Worst Case Scenario : (Difference between Strike Prices – Net Credit) x No of Contracts
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