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Bull Put Spread Option Strategy-Bullish Strategy

Bull-Put-Spread-Option-Strategy

Bull Put Spread Option Strategy-Bullish Options Trading Strategies

A Bull Put Spread, also known as a Bull Put Credit Spread strategy, is a Bullish strategy that is used when the underlying instrument's price is expected to increase modestly or be less volatile. The approach entails purchasing out-of-the-money (OTM) put option and selling in-the-money (ITM) put options at different strike price on the same underlying. This approach has a restricted risk and reward. The Bull Put Spread is designed to generate positive credit. Writing an in-the-money put option will earn the investor/trader a premium, which will aid in compensating for the out-of-the-money (OTM) put option.

Risk:

When the price of an asset falls, a risk component enters the picture. The utmost risk, however, is restricted to the expiration price of the long OTM put after deducting the net premium obtained.

Reward

Profit will be realized when the fundamental price rises above the target price of the Short Put on the expiry date.

Construction

Buy 1 OTM Put Option

Sell 1 ITM Put Option

BUll put spread

Option Type Expiry Date Strike Price LTP Action No. Of Lots
PUT 29/03/2023 17300.0 276.95 Sell 1
PUT 29/03/2023 17100.0 170.45 Buy 1

 

Assume the NIFTY has been trading around 17000 and the trader employs a Bull-Put-Spread strategy. He purchases one 17100 out-of-the-money (OTM) Put Option at a premium of Rs. 170 and shorts one 17000 in-the-money (ITM) Put Option for Rs. 276. The contract will result in a positive credit of Rs. 7875 ((275-170) *75.)

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Payoff Chart of Bull Put Spread Option Strategy
Max Risk Max Reward Lower Break Even Upper Break Even
93.499985 106.500015 17193.5 17193.5

 

Market Expiry Payoff 1 Payoff 2 Net Premium Option PayOffAt Expiry
16650.0 -650.0 450.0 106.5 -93.5
16700.0 -600.0 400.0 106.5 -93.5
16750.0 -550.0 350.0 106.5 -93.5
16800.0 -500.0 300.0 106.5 -93.5
16850.0 -450.0 250.0 106.5 -93.5
16900.0 -400.0 200.0 106.5 -93.5
16950.0 -350.0 150.0 106.5 -93.5
17000.0 -300.0 100.0 106.5 -93.5
17050.0 -250.0 50.0 106.5 -93.5
17100.0 -200.0 0.0 106.5 -93.5
17150.0 -150.0 0.0 106.5 -43.5
17200.0 -100.0 0.0 106.5 6.5
17250.0 -50.0 0.0 106.5 56.5
17300.0 0.0 0.0 106.5 106.5
17350.0 0.0 0.0 106.5 106.5
17400.0 0.0 0.0 106.5 106.5
17450.0 0.0 0.0 106.5 106.5

 

Bull Put Spread Option Trading Example

 

Scenario 1

At expiry if the NIFTY dips down to 16900, his net loss will be Rs. 7050 = {(-17300 + 16900) + (17100-16900) + (276-170)} *75

Loss = Loss on in the money put option + gain on at the money put short + net credit premium received from entering into contract.

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    Scenario 2

    if at expiry, NIFTY closes at 17300 level, both the Puts expire worthless and the trader gets to keep the premium received while executing the contract Rs. 7875.

    Moneysukh has been a trader oriented broker and have always tried to help clients in saving more and earn more. Moneysukh has introduced platform and concept of interest on ledger balance for clients who wish to make their option trading strategies.

    Also read Call Backspread Option Strategy

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