Options Trading Strategies: Bullish - Bull Put Spread

Explanation

Bull Put Spread option trading strategy is used by a trader who is bullish in nature and expects the underlying asset to move in an upward trend in the near future. This strategy includes buying of an ‘Out of the Money’ Put Option and selling of ‘In the Money’ Put Option of the same underlying asset and the same expiration date. When you write a Put, you will receive premium thereby engulfing the cost for buying of OTM Put Option. This strategy is also called as ‘Bull Put Credit Spread’ as your account gets credited while deploying the strategy.

Risk: Limited

Reward: Limited

Construction

Buy 1 ‘Out of the Money’ Put Option
Sell 1 ‘In the Money’ Put Option

Example

Suppose that the NIFTY is trading around 5300 level and Mr. X enters into Bull-Put-Spread strategy. Lot Size of NIFTY is 50. He buys one 5100 OTM Put Option for a premium of Rs. 45, and sells one 5400 ITM Put Option for Rs. 180. Hence his account will be credited by Rs. 6750. [(180-45)*50]

Case 1: At expiry if the NIFTY dips down to 5000 level, his net loss will be Rs. 8250. [{(100-45) + (180-400)}*50]

Case 2: At expiry if the NIFTY closes at 5200, then his net loss will be Rs. 3250. [{(180-400)-(45)}*50]

Case 3: At expiry if the spot NIFTY closes at 5500 level, both the Puts expire worthless and Mr. X gets to keep Rs. 6750.

Payoff Chart