What is a ‘Bull Put Spread’
A bull put spread is an elections strategy that is used when the investor expects a moderate react to in the price of the underlying asset. This strategy is constructed by purchasing one put opportunity while simultaneously writing another put option with a higher naught price. The combination results in the trader receiving a credit or income from the inducement received. The goal of this strategy is realized when the price of the underlying leads or stays above the higher strike price. This causes the put down option to expire worthless, resulting in the trader keeping the premium. The endanger of the strategy is limited by the bought put option.
Breaking Down the ‘Bull Put Spread’
A bull put spread demands an investor to purchase the underlying stock at the higher strike price if the make out put option is exercised. Additionally, if exercising the long put option is favorable, the investor has the right-wing to sell the underlying stock at the lower strike price. This pattern of strategy is known as a credit spread because the amount received from barter the put option with a higher strike is more than enough to garb the cost of purchasing the put with the lower strike.
Profit and Loss
The bull put spread tactics has limited risk, but also limited profit potential. Investors who are bullish on an underlying domestic could use a bull put spread to generate income with limited downside. The pinnacle possible profit using this strategy is equal to the difference between the amount be given from the written put and the amount used to pay for the long put. The maximum loss a businessman can incur when using this strategy is equal to the difference between the incapacitate prices and the net credit received. Bull put spreads can be created with in the rolling in it or out of the money put options. Both options have the same expiration girlfriend.
Bull Put Spread Example
Assume an investor is bullish on hypothetical beasts XYZ over the next month. The stock is currently trading at $275 per interest. Consequently, the investor implements a bull put spread by writing one put option with a cane price of $280 for $8.50 and purchasing one put option with a strike valuation of $270 for $2, which both expire in one month.
The investor’s highest point profit is limited to $650, or ($8.50 – $2) x 1 contract x 100 appropriates. The investor’s maximum loss is capped at $350, or ($280 – $270 – ($8.50 – $2)) x 1 contract x 100 partitions. Therefore, the investor is looking for the stock to close above $280 per cut on the expiration, which would be the point the maximum profit is achieved.