Order Entry: Net Credit
Ideal Environment: High IV
Profit Target: 50%
Definition: A bullish put spread consists of simultaneously selling an OTM put (higher strike) and buying an OTM put (lower strike). The net premium collected is the result of selling the more expensive OTM put that is closer to ITM compared to the OTM put bought that is further away from being ITM. The trade results in a bullish credit position. The trade is defined risk, meaning the max profit and loss are known when the trade is placed.
Bullish Put Spread Setup
Sell 1 OTM Put (closer to ATM)
Buy 1 OTM Put (further from ATM)
The max profit for a bullish put spread is the net credit received when the trade is put on. The best case scenario is that all the options expire worthless. This happens when the market price of the underlying asset is above the higher strike put at expiration.
Max Profit= Net Premium Received - Commissions Paid
To calculate the breakeven stock price for the trade, use the following formula:
Breakeven Stock Price = Short Put Strike Price - Premium Collected
If the stock price falls below the long put strike price at the expiration date, the trade undergoes a max loss.
Max Loss = Width of the Call Strikes – Premium Collected
Suppose stock ABC is trading at $50 in June. An options trader bullish on ABC decides to enter a bull put spread position by selling a July 47 put and buying a July 45 put at the same time, resulting in a net credit of $80 for entering this position.
The price of ABC stock subsequently drops to $48 at expiration. Both puts expire worthless because none of them are in the money. This is the maximum possible profit for the trade.
If the stock had fell to $45 instead, both options are in the money, and the options trader loses $120 on the trade. The 47 July put is $200 ITM, so that is a loss since you sold it when entering the trade. The 45 July put that was bought doesn’t have any intrinsic value. When you net out the $200 loss on the 47 put with the $80 credit received at the beginning of the trade, the result is a loss of $120. This is an example of the maximum possible loss.
When to use a bullish put spread strategy?
At Tradezy, we recommend to use this strategy for stocks with a high implied volatility. The trader should have a short to intermediate bullish thesis. We look to buy the spread position that has around 45 DTE with a 66% probability of profit. We are looking to collect about 1/3 of the width of the strikes. The goal is to sell this spread back for 50% of max profit.