Bull Put Spread
26 May 2017
Nilesh Jain
New Page 1
What is Bull Put Spread Option strategy?
A Bull Put Spread involves one short put with higher strike price and
one long put with lower strike price of the same expiration date. A Bull Put Spread is
initiated with flat to positive view in the underlying assets.
When to initiate Bull Put Spread
Bull Put Spread Option strategy is used when the option trader believes
that the underlying assets will rise moderately or hold steady in the near term. It
consists of two put options – short and long put.
Short put’s main purpose is to generate income, whereas long put is bought to limit
the downside risk.
How to Construct the Bull Put Spread?
Bull Put Spread is implemented by selling AttheMoney (ATM) Put option
and simultaneously buying OuttheMoney (OTM) Put option of the same underlying security
with the same expiry. Strike price can be customized as per the convenience of the trader.
Probability of making money
A Bull Put Spread has a higher probability of making money as compared
to Bull Call Spread. The probability of making money is 67% because Bull Put Spread will
be profitable even if the underlying assets holds steady or rise. While, Bull Call Spread
has probability of only 33% because it will be profitable only when the underlying assets
rise.
Strategy

Sell 1 ATM Put and Buy 1 OTM Put

Market Outlook

Neutral to Bullish

Motive

Earn income with limited risk

Breakeven at expiry

Strike Price of Short Put  Net Premium received

Risk

Difference between two strikes 
premium received

Reward

Limited to premium received

Margin required

Yes

Let’s try to understand with an example:
Nifty Current spot price (Rs)

9300

Sell 1 ATM Put of strike price (Rs)

9300

Premium received (Rs)

105

Buy 1 OTM Put of strike price (Rs)

9200

Premium paid (Rs)

55

Break Even point (BEP)

9250

Lot Size

75

Net Premium Received (Rs)

50

Suppose Nifty is trading at Rs 9300.
If Mr. A believes that price will rise above 9300 or hold steady on or before the expiry, so he enters Bull Put Spread by selling 9300 Put strike
price at Rs 105 and simultaneously buying 9200 Put strike price at Rs 55. The net premium
received to initiate this trade is Rs 50. Maximum profit from the above example would be
Rs 3750 (50*75). It would only occur when the underlying assets expires at or above 9300.
In this case, both long and short put options expire
worthless and you can keep the net upfront credit received that is Rs 3750 in the above
example. Maximum loss would also be limited if it breaches breakeven point on downside.
However, loss would be limited to Rs 3750(50*75).
For the ease of understanding, we did not take in to account commission
charges. Following is the payoff chart and payoff schedule assuming different scenarios of
expiry.
The Payoff Schedule:
On Expiry Nifty closes at

Payoff from Put Sold 9300 (Rs)

Payoff from Put Bought 9200
(Rs)

Net Payoff (Rs)

8800

395

345

50

8900

295

245

50

9000

195

145

50

9100

95

45

50

9200

5

55

50

9250

55

55

0

9300

105

55

50

9400

105

55

50

9500

105

55

50

9600

105

55

50

9700

105

55

50

Payoff diagram
Impact of Options Greeks:
Delta: Delta estimates how much the option price will change as the
stock price changes. The net Delta of Bull Put Spread would be positive, which indicates
any downside movement would result in loss.
Vega: Bull Put Spread has a negative Vega. Therefore, one should
initiate this strategy when the volatility is high and is
expected to fall.
Theta: Time decay will benefit this strategy as ATM strike has
higher Theta as compared to OTM strike.
Gamma: This strategy will have a short Gamma position, so any
downside movement in the underline asset will have a negative impact on the strategy.
How to manage Risk?
A Bull Put Spread is exposed to limited risk; hence carrying overnight
position is advisable.
Analysis of Bull Put Spread Options strategy:
A Bull Put Spread Options strategy is limitedrisk, limitedreward strategy. This
strategy is best to use when an investor has neutral to Bullish view on the underlying
assets. The key benefit of this strategy is the probability of making money is higher as
compared to Bull Call Spread.