What Is a Bull Put Spread?

What Is a Bull Put Spread?

Let me explain what a bull put spread is. It involves you simultaneously selling one put option while buying another at a lower strike price, both with the same expiration date. This setup lets you profit if the stock moves up or stays stable, and it keeps your potential losses in check. The two puts create a range between a high and low strike price, and you get a net credit from the premium difference.

Breaking It Down

I'm going to break down the components of a bull put spread, give you step-by-step examples, and show you when to use it effectively. Stick with me as we go through this.

Key Takeaways

You use a bull put spread when you expect a moderate rise in the underlying asset's price. To execute it, you buy a put option on a security and sell another for the same date but at a higher strike price. Your maximum loss is the difference between the strike prices minus the net credit you received. The maximum profit comes from the difference in the premiums of the two puts, but only if the stock closes above the higher strike at expiry.

Understanding a Bull Put Spread

Investors like you typically use put options to profit from a stock's decline, since a put gives you the right—but not the obligation—to sell the stock at or before expiration. Each put has a strike price where it converts to the underlying stock, and you pay a premium to buy one.

You buy puts when you're bearish, hoping the stock falls below the strike. But the bull put spread flips this to benefit from a rise. If the stock is above the strike at expiry, the put expires worthless—no one sells at a price lower than the market. So, if you bought the put, you lose the premium.

Profits and Losses From Put Options

If you sell a put, you hope the stock doesn't drop but rises above the strike, letting the option expire worthless. You keep the premium as the seller, but if the stock falls below the strike, the buyer exercises it, and you're obligated to buy at the higher price. The premium you got reduces based on how far the stock falls.

The bull put spread lets you keep that sold put's premium even if the price dips a bit.

Constructing the Bull Put Spread

To build this, you buy one put and pay its premium, then sell another put at a higher strike, getting a premium for that. Both expire on the same date. If the underlying price ends above the highest strike, both puts expire worthless, and you keep the net premium as max profit.

If you're bullish on a stock, this is a way to generate income with limited downside, though there's still loss risk.

Bull Put Profit and Loss

Your max profit is the difference between the sold put's premium and the bought one's cost—the net credit—and it hits if the stock closes above the higher strike. The strategy works if the price stays above that higher strike, making the sold option expire worthless.

A downside is that if the stock rises way above the upper strike, your profits are capped; you miss out on extra gains. Once the stock drops below the upper strike, you start losing, but the initial credit cushions it. If it falls below the lower strike, you hit max loss: strike difference minus net credit.

Pros and Cons

On the plus side, you earn income from the net credit right at the start, and your max loss is capped and known upfront. However, that max loss is the strike difference minus the credit, which can still hurt, and the strategy limits your profits, so you miss future gains if the stock skyrockets above the upper strike.

Example of a Bull Put Spread

Suppose you're bullish on Apple (AAPL) trading at $275, expecting it to rise over the next month. You sell a $280 put expiring in one month for $8.50 and buy a $270 put for $2. Your net credit is $6.50 per share, or $650 for 100 shares.

If Apple hits $300 at expiry, you get max profit of $650, since both puts expire worthless. But if it drops to $270 or below, you hit max loss of $350, calculated as the $10 strike difference minus the $6.50 credit, times 100. Ideally, you want it above $280 at expiration for full profit.

What Is a Bull Call Spread?

A bull call spread is for when you think a stock will moderately increase. You buy a lower-strike call (in-the-money) and sell a higher-strike one (out-of-the-money), same expiration. Gains max out if the stock is at or above the higher strike, losses limited to the net premium paid.

Can You Trade Options for Free?

Most brokers offer commission-free stocks and ETFs, but options usually have per-trade fees plus per-contract commissions.

What's a Covered Call Strategy?

A covered call means you hold a long stock position and sell a call on it. Use it when you expect little movement; the premium gives income and some downside protection. It's good for stable or slightly bullish markets to generate extra returns while holding the stock.

The Bottom Line

The bull put spread suits moderately bullish investors like you. It generates immediate income via premiums while capping gains and losses. It's great for sideways or slightly up markets with downside protection. Just pick strikes, expirations, and monitor conditions carefully to optimize your risk-reward. The limited upside might not appeal to everyone, but it's a solid tool for tuning your options trades in bullish scenarios.