BAJAJ BROKING
February 12, 2025
6 mins read
In this blog, we will discuss Bull Put Spread and how this options trading strategy works. We will talk about its benefits and limitations and we will also see an example of how to apply this strategy.
The Bull Put Spread is an options trading strategy, which has a possibility of generating profits with a restricted risk. This strategy of buying a put option and selling another around the same time takes place. He sells a put option at the higher strike price and buys another put option at the lower strike price. However, both these options have an expiry date of the same date.
The short put brings a premium to the trader. Meanwhile, the long put, with a lower strike price, acts as a safety mechanism which limits possible losses. A metric for net credit is the maximum profit that may be attained. This is calculated as the difference between the two premiums from the put options. The aim of Bull Put Spread strategy is for the asset's value to sit above the higher strike price when the expiry date occurs.
The strategy is for individuals who like a risk-reward profile that is defined to some extent at least. The potential losses are reduced and there are likely to be consistent income opportunities. This is especially so for a stable or slightly bullish market.
Long Put (Lower Strike Price)
The trader sells a put option to someone, with a strike price that is lower than current price of the asset, but is still close to the current price. As per the option the trader can purchase the asset at the strike price. In case, the price of the asset goes below the strike price, the profit potential is significantly high.
Short Put (Higher Strike Price)
The trader buys a put option from someone, with a strike price that is higher than the strike price of the option they bought. As per the option the trader has to sell the asset at the strike price if the buyer exercises the option. This ensures that the trader can earn a high profit should the price change as expected.
Net Credit:
The maximum potential profit of the strategy is termed Net Credit, and it equals the total of the premium received for the long put (put option sold) minus the premium paid from the short put (put option bought).
Market Stability or Moderate Bullishness:
If at all the price of the asset doesn’t fall below the higher strike price, then the options expire and become worthless. The full net credit amount then becomes the gain for the trader.
Partial Loss case:
If the price of the asset falls below the higher strike price but remains above the lower strike price then the trader incurs a loss. But then, this loss is offset by the net credit and is reduced partly.
Maximum Loss case:
If the price drops below the lower strike price, then in that case the trader might face the maximum potential loss of the trade. The loss is limited to the difference between the two strike prices, which is then reduced to some extent by the net credit.
Understanding the calculations for a Bull Put Spread strategy is essential to manage potential outcomes and optimize strategy execution. Here’s how the key metrics are determined:
Maximum Profit:
Formula: Maximum Profit=Net Credit Received
The maximum profit occurs when the underlying asset’s price remains above the higher strike price at expiration, causing both options to expire worthless.
Maximum Loss:
Formula: Maximum Loss=(Higher Strike Price−Lower Strike Price)−Net Credit Received
The maximum loss is incurred if the underlying asset’s price falls below the lower strike price at expiration.
Break-Even Point:
Formula: Breakeven Price=Higher Strike Price−Net Credit Received
The breakeven point represents the price at which the strategy neither gains nor loses money.
These calculations enable traders to assess the potential risk and reward before entering the trade.
Let’s consider an example to better understand how a Bull Put Spread strategy works in practice.
Scenario:
Underlying Asset Price: ₹100
Sell a Put Option:
Strike Price: ₹105
Premium Received: ₹10
Buy a Put Option:
Strike Price: ₹95
Premium Paid: ₹3
Net Credit: ₹10 - ₹3 = ₹7
Outcomes:
Underlying Asset Price at Expiration | Profit/Loss | Explanation |
₹110 | ₹7 (Maximum Profit) | Both options expire worthless. Net credit retained. |
₹105 | ₹7 (Maximum Profit) | Price equals the higher strike price. No additional cost. |
₹100 | ₹2 | Loss incurred as price moves below higher strike price but above lower strike price. |
₹95 | ₹-3 (Maximum Loss) | Loss equals the difference between strike prices minus net credit. |
Now that we have seen a Bull Put Spread Strategy example, let’s discuss it’s benefits.
Defined Risk and Reward: The strategy limits both maximum profit and loss, providing a clear understanding of potential outcomes.
Income Generation: The net credit received offers an immediate income upon initiating the trade.
Lower Cost: By selling a higher-strike put option, the cost of the protective lower-strike put option is partially or fully offset.
Versatile Market Application: Profitable in stable or moderately bullish markets, making it suitable for diverse scenarios.
Risk Limitation: The lower-strike put acts as insurance, capping potential losses.
Strategic Simplicity: Easy to execute and understand compared to more complex options strategies.
Limited Profit Potential: The maximum profit is capped at the net credit received, which may not appeal to highly bullish traders.
Dependent on Market Stability: The strategy requires the underlying asset price to remain above the breakeven point to ensure profitability.
Potential for Losses: If the price falls below the lower strike price, losses can occur, though they are limited.
Premium Sensitivity: The strategy’s effectiveness depends on favorable premium differences, which might not always be available.
Time Decay Risk: If the asset price fluctuates significantly, the time decay of options premiums can affect profitability.
The Bull Put Spread is a well-suited strategy for a slightly bullish market or even a stable market, not to mention for those searching for a balance between income generation and risk control. It may provide steady returns but with limited risk exposure. As always, though, when it comes to the market conditions, traders will have to analyze market conditions thoroughly and not be carried away by objective thought in making decisions.
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Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.
This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
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Share this article: 
The performance is market dependent. In stable or bullish markets, the strategy is highly successful, since the options expire worthless, leaving the trader to retain the net credit.
Leave the trade if the price of the asset goes below the breakeven or if there is a better alternative to avoid risks or realize gains before the trade expires.
Yes, as it is suited for a mildly bullish or neutral market with clearly defined risk and limited profit, while providing upfront income.
This one works by selling a higher-strike put and buying a lower-strike put to generate net credit. Profit will be earned if the asset's price remains above the higher strike price, but losses are capped at the spread minus the credit.
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