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Bull Put Spread
A Bull Put Spread is a limited risk, limited reward trade that's used when you're either slightly bullish, bearish or generally neutral.
Bull Put Spread
Risk: Limited
Reward: Limited
The Trade: Sell an out-of-the-money put and buy an even further out of the money put. Since a put with a higher strike price is sold, the trade is initiated for a credit.

ABC Stock trading at £5.00

Sell 1 Sep £4.50 put (B), buy 1 Sep £4.00 put (A) (see pay-off diagram below)

Options - Bull Put Spread

When to use: Similar to selling a put naked but your potential loss is limited via the purchase of a put with a lower strike price. Also, because of the protection it requires much less margin. This is a good trade when you might not know where the market is going, but feel that it's unlikely to fall drastically. For example, you are neutral to slightly bullish/bearish.
Volatility expectation: Neutral
Profit: Limited to the difference between the two strikes plus net premium credit. Maximum profit occurs where underlying rises to the level of the higher strike or above.
Loss: Maximum loss occurs where the underlying falls to the level of the lower strike or below
Breakeven: Reached when the underlying is below strike the first strike by the same amount as the net credit of establishing the position.
Time decay: Time decay will help, you are selling time.

Trading ideas and tactics:

  • Look to initiate in 'dips' in a strong bull market or at the lower end of trading ranges
  • A good strike to sell is the at-the-money put or just outside-the-money, gives you greater time value
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