In this post we will discuss options strategies that is bull put spread, It is very helfull for Options Seller, There are several other strategies like Bull Call Spread, Bull Put Spread, Call Ratio Back Spread, Bear Call Ladder and so on. So let’s start.
By trading in Options either stock Option or Index option you can earn money by two ways either by buying the options or writing the options, but in the post we will mostly focus on top Options writing strategies.
Spread Options Strategies
Spread are multileg strategies involving 2 or more legs, where you buy and sell the options, we can categorize them in Bull call spread, Bull put spread, Bear call spread and Bear put spread, so let’s discuss them one by one.
Bull Put Spread
Bull put spread is implemented when market have declined considerably, therefore put premium have increased, next the volatility is on higher side and there are plenty of time to expiry. Here we will short the ITM (in the money) put option to grab is, because when the volatility will break the option premium will decrease sharply.
This strategy is a net credit, and 2 leg option strategy.
Implementation:
Buy 1 OTM (Out of the Money) Put Option (leg 1)
Sell 1 ITM (In the money) Put Option (leg 2)
Conditions: All strikes belongs to same underlying and same expiry series and each leg involves same number of options.
Example:
Suppose Bank Nifty spot price is 41700, due to some reason bank nifty have fallen sharply and volatility have increased therefore option premium increased sharply.
We have shorted 1 ITM (in the money) put option at the price of 250 and then we will buy one OTM (out of the money) put option that is 41500 at the price of 85.
On expiry we will get the premium of 250 and we have paid the premium of 85, therefore this spread is in credit (250-85=165), it is also called the credit spread. Whereas Bull Call Spread is a net debit spread.
Now we will apply different scenario.
If Bank Nifty expires at the level of 41500
The intrincic value of 41800 Put would be 300 and we have sold the put.
therefore the payoff would be 250-300= -50
Next we have bought out of the money put of 41500 at the price of 85, and the intrincic value of the put would be 0, and we will lose our paid premium.
There for our net loss would be (-50)+(-85)=-135
If Bank Nifty expires at 41800 price
The intrincic value of the put 41800 would be zero, and we will get total premium of 250.
On the other side the intrincic value of the put 41500 would be zero, and we will lose all the premium.
Hence our total profit would be 250-85=165.
If bank Nifty Expires at 41600
The intrincic value of the put 41800 would be 200 and we have sold the put, therefore
Payoff would be 200-250=-50
41500 put premium would expire worthless and we will lose our premium of 85 points
Therefore net loss would be = 135 (50+85).
If bank Nifty Expires at 42000
The intrincic value of the put 41800 would be 0 and we have sold the put, therefore we will get all the premium hence,
Payoff would be 250
41500 put premium would expire worthless and we will lose our premium of 85 points
Therefore max Profit would be =250-85=165
Here you can check our maximum loss and maximum profit is limited, if the market goes downside then our maximum loss would be 50 points and our maximum profit would be 250 points.
Conclusion:
Spread = Difference of Higher and lower strike price= 41800-41500= 300
Bull put spread maximum loss= Spread – Net Credit
Net credit = Premium received for higher strike price- Premium paid for lower strike price
Bull call Spread max profit= Net Credit
Nirmal is a NISM Certified Derivative Trader & the Founder of InvestandEarn.net (Financial Blog). He entered the world of Equity research to explore his interests in financial markets having 5+ Years of Experience in Share Market Trading & Investing. Nirmal frequently writes about Share Market Trading & Investment and publishes his personal view on the market. Drop him a mail at nirmal.jaysval@investandearn.net.
