A Bull Put Spread involves selling a put and buying a put with a lower strike price within the same expiration month.
• Cost Basis Reduction: Put Spread also allows Cost Basis Reduction.
• Moderate Upward Movement: It too is executed when the general feeling towards an asset is positive and a moderate upward movement is expected.
• Low Risk, Low Reward and Lower Requirements: Again Debit Put Spread too involves low Risk, has low Requirements and will provide low Reward.
• Exchanging Upside Potential or Chance To Recover Premium: There is a higher Probability of Success compared to Long Calls, similar to Debit Call Spread. Here you will not only have a cost basis reduction, but also a higher Probability of Success in trading Calls.
An important point to note is that, if you have a bullish bias and want to reduce the Cost Basis, you will have to execute Credit Put Spread.
• Sell At-The-Money (ATM) Put Option with a higher Strike Price.
• Buy Out-of-The-Money (OTM) Put Option as a hedge.
• Use the same underlying asset and the same contract Expiration Date based on forecast accuracy.
• Select Strike Prices based on Probability of Success, and Tradespoon’s analytics.
The Profit and Loss graph for both Bullish Debit Call Spread and Bullish Credit Put Spread are identical; the x-axis denotes the Stock Price and y-axis denotes the Profit/Loss. Point A denotes the buying price and Point B denotes the selling price, which are the Strike Price selections. The Expiration Month is again 50-75 days. Maximum Loss will occur at Point A, meaning that if you are wrong and the stock sells off lower than point A, you will lose money. Maximum Gain will occur at Point B. The Break Even Point is the Debit Price you paid and is indicated by the point where the blue line intercepts the x-axis. This example is of a directional trade with bullish bias.
Return on Capital
• With Bull Put Spreads you pay the cost of the Long Put (Out-of-The-Money Option) and you earn proceeds from the sale of Short Put Option (At-The-Money Option).
• Capital required is the difference between the Strike Prices minus premium received.
• Maximum Gain occurs on reaching the higher Strike Price and is limited to the premium received.
• Maximum Loss is the difference between the Strike Prices minus the premium received.
• Break Even Point is again the point of intersection of the blue line on the x-axis.