Bull Put Spread Option Strategy

Overview

• Bull Put Spread: A limited risk strategy that profits when stock prices increase or remain above the put spread strike prices.
• Part of four vertical spread option strategies.
• Benefits: Limited loss potential compared to buying 100 shares of stock, higher probability of profit (over 50%).

Strategy Mechanics

• Consists of two option transactions:
  • Sell a put option.
  • Buy a put option at a lower strike price within the same expiration cycle.
• Reduces loss potential compared to selling a put alone.
• Results in less profit potential due to reduced premium collection.

Example Trade

• Stock price at entry: $90.
• Sell 90 put for $5.09.
• Buy 85 put for $2.84.
• Net premium collected: $2.25.

Profit and Loss

• Maximum Profit: Net credit ($2.25) x 100 = $225.
• Maximum Loss: Width of the strikes ($5) - Credit received ($2.25) x 100 = $275.
• Breakeven Price: Short put strike ($90) - Net credit ($2.25) = $87.75.

Historical Trade Example

• Stock price at entry: $716.03
• Options with 67 days to expiration.
• Sell 700 put for $30.20, buy 640 put for $12.15.
• Net credit: $18.05.
• Max Profit: $1,805; Max Loss: $4,195.
• Breakeven Price: $681.95.
• Shows non-linear nature of option trading profitability.

Setup on Tastyworks Platform

• Example with IWM (Russell 2000 ETF).
• Choose expiration cycle, e.g., 71 days (August 2019).
• Sell 145 put, buy 140 put for a $5 wide spread.
• Mid price: $1.30; Max profit: $130; Max loss: $370.
• Breakeven Price: $143.70.

FAQs

Can you close before expiration?

• Yes, close by reversing initial trade (buy back sold put, sell bought put).

Can you hold through expiration if in the money?

• Possible, but results in exercise/assignment fees, potential stock position.

Conclusion

• Bull put spread provides a way to profit with limited risk.
• High probability of profit despite lower potential returns compared to other strategies.