Understanding Bull Put Spread Strategy

The bull put spread option strategy is a limited risk strategy that profits when the stock price increases or at least remains above the put spread strike prices as time passes. The bull put spread is one of the four vertical spread option strategies. The benefits of the bull put spread strategy include limited loss potential if the stock price falls and compared to buying 100 shares of stock, the loss potential is typically going to be far less significant than the loss potential when buying 100 shares of stock. The bull put spread strategy is also a high probability trading strategy, meaning the probability of making money on any particular bull put spread position is theoretically above 50%. In this video I'm going to visually explain to you exactly how the bull put spread option strategy works. We're going to look at numerous trade examples so you can see exactly how the strategy performs based on various stock price movements, and I'm also going to show you how to set up the bull put spread strategy on the Tastyworks desktop trading platform. Stay tuned. The bull put spread is an option strategy that profits when the stock price remains above the put spread's strike prices as time passes. The stock price can even decrease a little bit and the strategy can still make money. We'll talk about that in just a moment. Other names for the bull put spread strategy include a short put spread, put credit spread, or simply selling a put spread. The bull put spread consists of two option transactions, the first one being selling a put option and the second one being selling a put. purchasing another put option at a lower strike price. So to create a bull put spread, you sell a put option and buy another put option at a lower strike price in the same expiration cycle as the put option that you sold. Compared to just selling a put option, buying a put option at a lower strike price against the put that you've sold reduces the loss potential of the position, which means the risk is far less significant than if you were to just sell a put option all by itself. However, by purchasing a put option against the put that you've sold, You reduce the amount of option premium that you collect when entering the position, which means you have less profit potential compared to just selling a put option all by itself. Let's take a look at a hypothetical short put spread position and look at the expiration profit and loss graph so you can see exactly how the strategy is expected to perform based on various stock prices at expiration. In this example, let's say the stock price is right at $90 per share at the time of entering the put spread position. I'm going to create a bull put spread from the following options. To construct a bull put spread position, I'm going to sell the 90 put for $5.09, and I'm going to purchase the 85 put for $2.84. Since I collected $5.09 for selling the 90 put, and I paid $2.84 for purchasing the 85 put, the net premium collected in this example is $2.25. In options trading, if you collect more premium than you pay out when you enter an option position, which is the case with this put spread, it is said to be entered for a net credit. In this example, a trader might say that they sold the 90.85 put spread for a net credit of $2.25. Let's take a look at the expiration profit and loss graph for this particular example. put spread position. Here we're looking at the profit and loss figures for this particular put spread position based on various stock prices at expiration. But where do these profit and loss figures come from? The maximum profit potential of a bull put spread position is the net credit times the option contract multiplier of 100. In this example the net credit is $2.25 and if I multiply that by 100, which is the option contract multiplier, I get a maximum profit potential of $225. dollars. When selling options or selling spreads the best case scenario is that the options expire worthless in which case you keep a hundred percent of the premium that you collected when selling that option or spread. In this example if I sell the spread for two dollars and twenty five cents and the spread expires worthless or with a value of zero dollars I will have a two dollar and twenty five cent profit per spread and when I multiply that by the option contract multiplier of 100 I get a maximum profit potential of of $225 per spread that I sell. The maximum loss potential of a bull put spread position is the width of the strikes less the credit received times 100. In this case, the spread is $5 wide since I sold the 90 put and I purchased the 85 put. The distance between those strike prices is $5. Since I collected $2.25 for selling the put spread, the most the spread can move against me before hitting its maximum value or the width of the strike. is $2.75. If I sell a spread for $2.25 and it increases to $5, that represents a $2.75 increase against me. And if I multiply that by the option contract multiplier of 100, I get a max maximum loss potential of $275 per put spread that I sell. The break-even price of a bull put spread at expiration is the short put strike price less the net credit received when entering the trade. In this case, the short put strike price is $90 and I collected $2.25 for selling the spread, which brings the break-even price to $87.75. So if I take the short put strike price of $90 and subtract the net premium received of $2.25, I get a break-even price of $87.75. Now that we've discussed a hypothetical bull put spread example trade, let's go ahead and look at some historical bull put spread trades using historical option data so you can see how real bull put spreads have traded in the past based on the specific scenarios that those trades encountered. In this example, we're going to look at a scenario where the bull put spread ends up with the maximum profit potential at expiration. Here are the trade details. At the time of entering the trade, the stock price was $716.03. The options used in this example had 67 days until expiration. To construct the bull put spread, I sold the 700 put for $30.20. and I purchased the 640 put for $12.15. The net credit in this example is $18.05 since I collected $30.20 for selling the 700 put and paid $12.15 for buying the 640 put. The maximum profit potential of this put spread position is $1,805 and that comes from the $18.05 credit received times the option contract multiplier of 100, which is $1,800. If I sell this spread for $18.05 and it expires with a value of $0, that translates to an $18.05 profit per spread, and when multiplied by the option contract multiplier of 100, I get a profit of $1,805. The maximum loss potential in this case is $4,195, and that's because the spread width is $60, and I sell the spread initially for $18.05. If I sell a 60 point wide spread for $18.05, the most the spread can increase against me before reaching its spread width of $60 is $41.95. And when I multiply that by the option contract multiplier of 100, I get a maximum loss potential of $4,195 per put spread sold. The breakeven price in this example is $681.95, and that's because the short put strike price is $700. and the net credit received is $18.05. If I take $700 minus $18.05, I get a break-even price of $681.95. If the stock price is right at $681.05 at expiration, the 700 put will have $18.05 of intrinsic value, and the 640 put will expire worthless, and therefore the 700 640 put spread will have an expiration value of $18.05. of $18.05 if the stock price is exactly at $6.8195. Let's take a look at how this trade performed. On the very top of the chart, we're looking at the price changes of the stock price relative to the strike prices of the put spread. On the bottom of the chart, we're looking at the price changes of the put spread itself. Over the first 22 days of the trade, the stock price was extremely volatile and the spread had many transitions from profitable territory to unprofitable territory. Most notably, the stock price increased to a value of $775, at which point the spread had 45 days left until expiration. Because time had passed and the stock price was nearly $75 above the put spread's strike prices, the put spread's value fell to about $6. With an initial sale price of $18.05, the spread's decrease to $6 represents an unrealized profit of $1,205 per spread. If the trader wanted to take that profit at that moment, they could buy back the put spread at $1,200 per spread. back the spread for $6 at that moment, in which case they would realize a profit of $1,205 per spread. But let's say the trader held the position through expiration. The stock price quickly reversed directions and fell from $775 to nearly $682, which meant the put spread was in the money. With a significant stock price decrease, the spread's value went from $6 at 45 days to expiration to $25 at 38 days to expiration. With an initial sale price of $18.05, the spread's value at $25 represents a loss of $695 per spread. Fortunately, the stock price recovered and ended up being above both put spread strike prices at the time of expiration, which means the $700... 640 put spread expired completely worthless and realized the maximum profit potential of $1,805 for a trader who sold the spread for $18.05. I personally love this example because it demonstrates that when you trade options, it's very rare to have a situation in which the profitability of your position is linear. When trading options, it's very common to have many moments throughout a trade's duration where the position is not profitable, but later on becomes profitable, and that's just the nature of trading in general. In this next trade example, we'll look at a scenario where the bull put spread ends up with the maximum loss potential at expiration. Here are the trade details. At the time of entering the trade, the stock price was at $109.96. The options used in this example had 46 days until expiration. To construct the bull put spread, I sold the 110 put for $9.22 and I bought the 95 put for $3.67. The net credit in this example is $5.55 since I collected $9.22 for selling the 110 put but paid $3.67 for buying the 95 put. The maximum profit potential in this example is $555 which comes from the $5.55 that I sold the 110 put for $3.67. the $5.55 net credit times the option contract multiplier of 100. If I sell a spread for $5.55, the best case scenario is that the spread expires worthless, in which case I have a $5.55 profit per spread, and when I account for the option contract multiplier of 100, that profit comes out to $555 per put spread that I sold. In this case, the maximum loss potential is $945. $145 per spread, which comes from the $15 strike width less the $5.55 net credit received. If I sell a spread for $5.55 and that spread's value increases to $15, that represents a $9.45 move against me, and when I account for the option contract multiplier of $100, I get a loss of $945 per spread. The expiration break-even price of this position is $104. 45. That comes from the short put strike price of $110 less the net credit received of $5.55 which comes out to $104.45. If the stock price is exactly at $104.45 at expiration, the $110 put will be worth $5.50 and the $95 put will be worthless resulting in the $110.95 put spread having a value of $5.55 at expiration which is exactly the same price that I collected it when I initially entered the trade. Let's see what goes wrong with this position. As we know, the bull put spread is a bullish trading strategy that profits when the stock price increases or at least remains above the put spread strike prices as time passes. It makes complete sense then that this trade did not make any money because over the entire duration of the trade, the stock price was decreasing. With the stock price completely below both put spread strike prices at expiration, the put spread in this example expired worth its maximum value. of $15 at expiration, which translates to the maximum loss potential of $945 for any trader who sold the spread for $5.55. Now that we've looked at bull put spread example trades that have made and lost money, what does it look like to set up a bull put spread using real trading software? For this example, I'm gonna hop onto the Tastyworks desktop trading platform and show you exactly how to set up a bull put spread using the platform. Be sure to check the link in the description to learn how to use it. how you can get one of our paid courses completely free when you open and fund your first Tastyworks brokerage account using the project option referral code. I've just opened up the Tastyworks trading platform and currently I'm looking at the chart of IWM which is the Russell 2000 ETF. As we can see here the Russell has rebounded a little bit from this decline that it recently experienced and it bounced from a price of around $145. Now if I was a technical trader and I thought that this support level so to to speak would hold up in the future one thing I could do to potentially profit from that would be to sell a put spread to start that process I'm going to open up the trade tab and now I have to choose an expiration cycle to trade for this example I'm gonna go out to the 71 day expiration cycle which is August 2019 and all I have to do is click on the expiration cycle to show all the options within the August 2019 expiration cycle that have 71 days to go so to start my bull put spread I'm going to click on the bid price of the 145 put and this queues up in order to potentially sell this put option but this is not an actual trade yet because I have not sent the order. This is just merely setting up the position. So if I want to sell the 145 put option Let's say I want to sell a $5 wide put spread. in which case i would have to purchase the 140 put which has a strike price that is five dollars below the short strike of 145. so to queue up an order to buy the 140 put i'm going to click on the ask price of the 140 put and now i have an order queued up for the 145 140 bull put spread in iwm that expires in 71 days the current mid price of this spread is 1.30 and that translates to a maximum profit potential of $130 and a maximum loss potential of about $370. Profit potential relative to the loss potential may seem a bit illogical to you but this is just telling us that this is a very high probability strategy since the profit is less than the loss potential and on the bottom left here it says the probability of profit is 66% which means that if I sell this put spread for $1.30 and I hold it through expiration in 71 days in theory there's a 66% probability that I will have at least a one penny profit on this particular trade. Now if I wanted to visualize the risk profile of this position, I could go to the curve view, click on analysis, and then this will show me the expiration risk profile graph for this particular bull put spread position. So this little green flag is the current price of IWM, which is right around $149. And as we can see, as long as IWM remains above $145 through expiration this put spread will expire worthless and therefore the maximum profit potential will be realized unfortunately if the stock price decreases and IWM is below $140 in 71 days this put spread will take on its maximum value of $5 which is the width between the strikes and if this spread increases to $5 since I sold it for a dollar and 30 cents my loss per spread will be $370. The break-even price of this spread is going to be the short put strike price of $145 less the entry credit of $1.30 which comes out to $143.70. I hope those tips were helpful and that you have a much better understanding of how to set up a bull put spread using whatever brokerage software you're currently using but especially if you're on Tastyworks. To wrap up this video I'm going to go over a couple frequently asked questions related to the bull put spread strategy. The first question is can you close a bull put spread position before expiration or do you have to hold it through expiration once you've entered the trade? The answer is that you can always close an option position before expiration no matter what you're trading. When trading a bull put spread or selling a put spread, the trade is to sell a put option and buy a put option at a lower strike price. So to close the bull put spread position, all you have to do is buy back the put that you sold and sell the put that you purchased. By doing so, you will effectively lock in whatever profit or loss the spread has at the time of closing the trade. For example, if you sell a put spread for $7.60 and the stock price increases over a couple weeks and the spread's value falls to $4, if you buy back the spread for $4, you will lock in a profit of $3.60 per spread since you sold the spread for $7.60 and bought the spreads back for $4. In that case, your actual profit would be $360. $60 per put spread that you sold and later purchased back for a lower price. The next question is, can you hold a short put spread position through expiration if the options are in the money? And the answer is that you can hold a spread through expiration if the options are in the money. And in the case of selling a put spread, if the stock price is completely below both put spread strike prices, meaning both puts are in the money, if you hold those put options through expiration, you will not end up with any share position, but your broker brokerage firm will charge you exercise and assignment fees, which in most cases is not going to be a situation you want to be in. However, if only the short puts are in the money at expiration and the long puts are out of the money, which essentially means the stock price is in between the short put and long put strike prices at the time of expiration, you will end up with a stock position if you hold those short puts through expiration. Since you have 8 short put options and you let them expire in the money, you will end up with 800 shares of stock if you do so. That's a wrap on the bull put spread option strategy video everybody. I really hope you enjoyed this video and you learned something. If you did please give this video a thumbs up and leave a comment down below if you have any feedback or suggestions for future videos. Be sure to check the links down in the description for additional resources. I'm Chris from ProjectOption.com and I will see you in the next video.

The bull put spread strategy is also a high probability trading strategy, meaning the probability of making money on any particular bull put spread position is theoretically above 50%. In this video I'm going to visually explain to you exactly how the bull put spread option strategy works. We're going to look at numerous trade examples so you can see exactly how the strategy performs based on various stock price movements, and I'm also going to show you how to set up the bull put spread strategy on the Tastyworks desktop trading platform. Stay tuned. The bull put spread is an option strategy that profits when the stock price remains above the put spread's strike prices as time passes.

The stock price can even decrease a little bit and the strategy can still make money. We'll talk about that in just a moment. Other names for the bull put spread strategy include a short put spread, put credit spread, or simply selling a put spread.

The bull put spread consists of two option transactions, the first one being selling a put option and the second one being selling a put. purchasing another put option at a lower strike price. So to create a bull put spread, you sell a put option and buy another put option at a lower strike price in the same expiration cycle as the put option that you sold.

Compared to just selling a put option, buying a put option at a lower strike price against the put that you've sold reduces the loss potential of the position, which means the risk is far less significant than if you were to just sell a put option all by itself. However, by purchasing a put option against the put that you've sold, You reduce the amount of option premium that you collect when entering the position, which means you have less profit potential compared to just selling a put option all by itself. Let's take a look at a hypothetical short put spread position and look at the expiration profit and loss graph so you can see exactly how the strategy is expected to perform based on various stock prices at expiration. In this example, let's say the stock price is right at $90 per share at the time of entering the put spread position.

I'm going to create a bull put spread from the following options. To construct a bull put spread position, I'm going to sell the 90 put for $5.09, and I'm going to purchase the 85 put for $2.84. Since I collected $5.09 for selling the 90 put, and I paid $2.84 for purchasing the 85 put, the net premium collected in this example is $2.25.

In options trading, if you collect more premium than you pay out when you enter an option position, which is the case with this put spread, it is said to be entered for a net credit. In this example, a trader might say that they sold the 90.85 put spread for a net credit of $2.25. Let's take a look at the expiration profit and loss graph for this particular example.

put spread position. Here we're looking at the profit and loss figures for this particular put spread position based on various stock prices at expiration. But where do these profit and loss figures come from? The maximum profit potential of a bull put spread position is the net credit times the option contract multiplier of 100. In this example the net credit is $2.25 and if I multiply that by 100, which is the option contract multiplier, I get a maximum profit potential of $225. dollars.

When selling options or selling spreads the best case scenario is that the options expire worthless in which case you keep a hundred percent of the premium that you collected when selling that option or spread. In this example if I sell the spread for two dollars and twenty five cents and the spread expires worthless or with a value of zero dollars I will have a two dollar and twenty five cent profit per spread and when I multiply that by the option contract multiplier of 100 I get a maximum profit potential of of $225 per spread that I sell. The maximum loss potential of a bull put spread position is the width of the strikes less the credit received times 100. In this case, the spread is $5 wide since I sold the 90 put and I purchased the 85 put.

The distance between those strike prices is $5. Since I collected $2.25 for selling the put spread, the most the spread can move against me before hitting its maximum value or the width of the strike. is $2.75. If I sell a spread for $2.25 and it increases to $5, that represents a $2.75 increase against me. And if I multiply that by the option contract multiplier of 100, I get a max maximum loss potential of $275 per put spread that I sell.

The break-even price of a bull put spread at expiration is the short put strike price less the net credit received when entering the trade. In this case, the short put strike price is $90 and I collected $2.25 for selling the spread, which brings the break-even price to $87.75. So if I take the short put strike price of $90 and subtract the net premium received of $2.25, I get a break-even price of $87.75.

Now that we've discussed a hypothetical bull put spread example trade, let's go ahead and look at some historical bull put spread trades using historical option data so you can see how real bull put spreads have traded in the past based on the specific scenarios that those trades encountered. In this example, we're going to look at a scenario where the bull put spread ends up with the maximum profit potential at expiration. Here are the trade details.

At the time of entering the trade, the stock price was $716.03. The options used in this example had 67 days until expiration. To construct the bull put spread, I sold the 700 put for $30.20. and I purchased the 640 put for $12.15.

The net credit in this example is $18.05 since I collected $30.20 for selling the 700 put and paid $12.15 for buying the 640 put. The maximum profit potential of this put spread position is $1,805 and that comes from the $18.05 credit received times the option contract multiplier of 100, which is $1,800. If I sell this spread for $18.05 and it expires with a value of $0, that translates to an $18.05 profit per spread, and when multiplied by the option contract multiplier of 100, I get a profit of $1,805.

The maximum loss potential in this case is $4,195, and that's because the spread width is $60, and I sell the spread initially for $18.05. If I sell a 60 point wide spread for $18.05, the most the spread can increase against me before reaching its spread width of $60 is $41.95. And when I multiply that by the option contract multiplier of 100, I get a maximum loss potential of $4,195 per put spread sold.

The breakeven price in this example is $681.95, and that's because the short put strike price is $700. and the net credit received is $18.05. If I take $700 minus $18.05, I get a break-even price of $681.95.

If the stock price is right at $681.05 at expiration, the 700 put will have $18.05 of intrinsic value, and the 640 put will expire worthless, and therefore the 700 640 put spread will have an expiration value of $18.05. of $18.05 if the stock price is exactly at $6.8195. Let's take a look at how this trade performed. On the very top of the chart, we're looking at the price changes of the stock price relative to the strike prices of the put spread. On the bottom of the chart, we're looking at the price changes of the put spread itself.

Over the first 22 days of the trade, the stock price was extremely volatile and the spread had many transitions from profitable territory to unprofitable territory. Most notably, the stock price increased to a value of $775, at which point the spread had 45 days left until expiration. Because time had passed and the stock price was nearly $75 above the put spread's strike prices, the put spread's value fell to about $6. With an initial sale price of $18.05, the spread's decrease to $6 represents an unrealized profit of $1,205 per spread. If the trader wanted to take that profit at that moment, they could buy back the put spread at $1,200 per spread.

back the spread for $6 at that moment, in which case they would realize a profit of $1,205 per spread. But let's say the trader held the position through expiration. The stock price quickly reversed directions and fell from $775 to nearly $682, which meant the put spread was in the money.

With a significant stock price decrease, the spread's value went from $6 at 45 days to expiration to $25 at 38 days to expiration. With an initial sale price of $18.05, the spread's value at $25 represents a loss of $695 per spread. Fortunately, the stock price recovered and ended up being above both put spread strike prices at the time of expiration, which means the $700...

640 put spread expired completely worthless and realized the maximum profit potential of $1,805 for a trader who sold the spread for $18.05. I personally love this example because it demonstrates that when you trade options, it's very rare to have a situation in which the profitability of your position is linear. When trading options, it's very common to have many moments throughout a trade's duration where the position is not profitable, but later on becomes profitable, and that's just the nature of trading in general. In this next trade example, we'll look at a scenario where the bull put spread ends up with the maximum loss potential at expiration.

Here are the trade details. At the time of entering the trade, the stock price was at $109.96. The options used in this example had 46 days until expiration. To construct the bull put spread, I sold the 110 put for $9.22 and I bought the 95 put for $3.67. The net credit in this example is $5.55 since I collected $9.22 for selling the 110 put but paid $3.67 for buying the 95 put.

The maximum profit potential in this example is $555 which comes from the $5.55 that I sold the 110 put for $3.67. the $5.55 net credit times the option contract multiplier of 100. If I sell a spread for $5.55, the best case scenario is that the spread expires worthless, in which case I have a $5.55 profit per spread, and when I account for the option contract multiplier of 100, that profit comes out to $555 per put spread that I sold. In this case, the maximum loss potential is $945.

$145 per spread, which comes from the $15 strike width less the $5.55 net credit received. If I sell a spread for $5.55 and that spread's value increases to $15, that represents a $9.45 move against me, and when I account for the option contract multiplier of $100, I get a loss of $945 per spread. The expiration break-even price of this position is $104. 45. That comes from the short put strike price of $110 less the net credit received of $5.55 which comes out to $104.45.

If the stock price is exactly at $104.45 at expiration, the $110 put will be worth $5.50 and the $95 put will be worthless resulting in the $110.95 put spread having a value of $5.55 at expiration which is exactly the same price that I collected it when I initially entered the trade. Let's see what goes wrong with this position. As we know, the bull put spread is a bullish trading strategy that profits when the stock price increases or at least remains above the put spread strike prices as time passes. It makes complete sense then that this trade did not make any money because over the entire duration of the trade, the stock price was decreasing. With the stock price completely below both put spread strike prices at expiration, the put spread in this example expired worth its maximum value.

of $15 at expiration, which translates to the maximum loss potential of $945 for any trader who sold the spread for $5.55. Now that we've looked at bull put spread example trades that have made and lost money, what does it look like to set up a bull put spread using real trading software? For this example, I'm gonna hop onto the Tastyworks desktop trading platform and show you exactly how to set up a bull put spread using the platform. Be sure to check the link in the description to learn how to use it. how you can get one of our paid courses completely free when you open and fund your first Tastyworks brokerage account using the project option referral code.

I've just opened up the Tastyworks trading platform and currently I'm looking at the chart of IWM which is the Russell 2000 ETF. As we can see here the Russell has rebounded a little bit from this decline that it recently experienced and it bounced from a price of around $145. Now if I was a technical trader and I thought that this support level so to to speak would hold up in the future one thing I could do to potentially profit from that would be to sell a put spread to start that process I'm going to open up the trade tab and now I have to choose an expiration cycle to trade for this example I'm gonna go out to the 71 day expiration cycle which is August 2019 and all I have to do is click on the expiration cycle to show all the options within the August 2019 expiration cycle that have 71 days to go so to start my bull put spread I'm going to click on the bid price of the 145 put and this queues up in order to potentially sell this put option but this is not an actual trade yet because I have not sent the order.

This is just merely setting up the position. So if I want to sell the 145 put option Let's say I want to sell a $5 wide put spread. in which case i would have to purchase the 140 put which has a strike price that is five dollars below the short strike of 145. so to queue up an order to buy the 140 put i'm going to click on the ask price of the 140 put and now i have an order queued up for the 145 140 bull put spread in iwm that expires in 71 days the current mid price of this spread is 1.30 and that translates to a maximum profit potential of $130 and a maximum loss potential of about $370.

Profit potential relative to the loss potential may seem a bit illogical to you but this is just telling us that this is a very high probability strategy since the profit is less than the loss potential and on the bottom left here it says the probability of profit is 66% which means that if I sell this put spread for $1.30 and I hold it through expiration in 71 days in theory there's a 66% probability that I will have at least a one penny profit on this particular trade. Now if I wanted to visualize the risk profile of this position, I could go to the curve view, click on analysis, and then this will show me the expiration risk profile graph for this particular bull put spread position. So this little green flag is the current price of IWM, which is right around $149. And as we can see, as long as IWM remains above $145 through expiration this put spread will expire worthless and therefore the maximum profit potential will be realized unfortunately if the stock price decreases and IWM is below $140 in 71 days this put spread will take on its maximum value of $5 which is the width between the strikes and if this spread increases to $5 since I sold it for a dollar and 30 cents my loss per spread will be $370. The break-even price of this spread is going to be the short put strike price of $145 less the entry credit of $1.30 which comes out to $143.70.

I hope those tips were helpful and that you have a much better understanding of how to set up a bull put spread using whatever brokerage software you're currently using but especially if you're on Tastyworks. To wrap up this video I'm going to go over a couple frequently asked questions related to the bull put spread strategy. The first question is can you close a bull put spread position before expiration or do you have to hold it through expiration once you've entered the trade? The answer is that you can always close an option position before expiration no matter what you're trading.

When trading a bull put spread or selling a put spread, the trade is to sell a put option and buy a put option at a lower strike price. So to close the bull put spread position, all you have to do is buy back the put that you sold and sell the put that you purchased. By doing so, you will effectively lock in whatever profit or loss the spread has at the time of closing the trade. For example, if you sell a put spread for $7.60 and the stock price increases over a couple weeks and the spread's value falls to $4, if you buy back the spread for $4, you will lock in a profit of $3.60 per spread since you sold the spread for $7.60 and bought the spreads back for $4.

In that case, your actual profit would be $360. $60 per put spread that you sold and later purchased back for a lower price. The next question is, can you hold a short put spread position through expiration if the options are in the money? And the answer is that you can hold a spread through expiration if the options are in the money. And in the case of selling a put spread, if the stock price is completely below both put spread strike prices, meaning both puts are in the money, if you hold those put options through expiration, you will not end up with any share position, but your broker brokerage firm will charge you exercise and assignment fees, which in most cases is not going to be a situation you want to be in.

However, if only the short puts are in the money at expiration and the long puts are out of the money, which essentially means the stock price is in between the short put and long put strike prices at the time of expiration, you will end up with a stock position if you hold those short puts through expiration. Since you have 8 short put options and you let them expire in the money, you will end up with 800 shares of stock if you do so. That's a wrap on the bull put spread option strategy video everybody.

I really hope you enjoyed this video and you learned something. If you did please give this video a thumbs up and leave a comment down below if you have any feedback or suggestions for future videos. Be sure to check the links down in the description for additional resources.

I'm Chris from ProjectOption.com and I will see you in the next video.

Transcript for:Understanding Bull Put Spread Strategy

Transcript for:
Understanding Bull Put Spread Strategy