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Bull-Put Credit Spreads...
This strategy is to realize a profit by making cash that is a net credit formed by the difference in a SOLD PUT price and a BOUGHT PUT price. While the stock goes up, the investor keeps the net credit (difference in premiums).
Bull Put Option Spreads SELL a PUT at or near money (higher strike price).
BUY a PUT one or more strikes below #1 PUT in the same month, this provides the downside safety.
Bull Put Option Spreads The margin requirement is the difference between the strike prices, usually 5 points/dollars.
The maximum risk is the difference between the strike prices, less the net credit (difference in premiums).
Bull Put Option Spreads The maximum profit is the net credit (difference in premiums).
Bull Put Option Spreads The break even point is the higher strike price (#1) minus the net credit.
Profit is realized when the stock price rises above this number.
Bull Put Option Spreads Maximum profit is made when the stock price rises above the higher strike price (#1 PUT).
A profit is realized at any stock price between the break even point and the net credit.
 
The return calculations for the Bull-Put Credit Spread are:
% Return = (Premium on SOLD PUT - Premium on BOUGHT PUT) ÷ (Margin - Net Credit)
% Return = (Net Credit) ÷ (Margin - Net Credit)
Where...
Margin = SOLD PUT strike price - BOUGHT PUT strike price
Net Credit = Premium on SOLD PUT - Premium on BOUGHT PUT
 
Example: Stock XYZ at $94.90 per share.
Write (Sell) the SEP 90 PUT for $1.35
Buy the SEP 85 PUT for $0.60
Net Credit = Premium Received - Purchase Premium = $1.35 - $0.60 = $0.75
% Return = (Premium on SOLD PUT - Premium on BOUGHT PUT) ÷ (Margin - Net Credit)
% Return = (1.35 - 0.60) ÷ ((90 - 85) - (1.35 - 0.60)) = 17.6% if stock is > $90
Max. Risk = Margin - Net Credit = $5 - $0.75 = $4.25, if stock is < $85
Max. Profit = Net Credit = $0.75, if stock is > $90
Break Even = Higher Strike - Net Credit = $90 - $0.75 = $89.25

Bull Put Spreads - Bull-Put Credit Spreads

Advantages of this strategy:
This is a BULLISH strategy, the entire profit can be realized when the stock price is above the short option strike price at expiration without closing either PUT position. Partial profit may be realized if the stock price is higher than the break even at expiration, but the spread will need to be closed.
If the stock goes very high gains are limited to the net credit.
Losses are limited to the difference in strike prices, usually about 5 points minus the net credit.
Works out OK if there is a very large decline because the BOUGHT PUT gains in value same as loss on the SOLD PUT side.
In the case of a decline, the investor can buy to close the short PUT position early and continue to profit from the long put as the underlying drops.
Highly leveraged investment because of the low margin requirement to initiate the position.
This is an option only strategy, no shares of stock are actually owned. (uncovered position).
Cautions with this strategy:
Anytime the underlying stock/index price is below the short put strike price, there is a chance that you may have to purchase stock to meet the short put obligation. Were this to happen you could sell the shares at the market pricing, or use the long put to sell the shares at the long put strike price.
The credit you receive for the trade is generally much smaller than the max risk of the trade, therefore it is prudent to close the short option before the position is at max loss. Many traders do this when the short option is near-the-money.
If you have closed the short option half of the trade you may want to consider holding the long option to possibly profit from continued directional momentum in the underlying. However, the danger is that the underlying will correct and whipsaw in the other direction.
Research Tips:
Bear Put Option Spreads If you like the risk/reward of the Credit Spread strategy but are bearish: Bear-Call Credit Spread
Bear Put Option Spreads If you are Bullish on the stock but prefer Debit spreads: Bull-Call Debit Spreads.
Bear Put Option Spreads For more information on the Parity Strategy to Bull-Put Credit spreads: Parity Trading - Option Spreads and Parity Option Trades Revisited

Bull Put Spreads - Bull-Put Credit Spreads - Bull Put Option Spreads


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