option-info and options-graphs sites:
Put , (1
strike down to 1 strike up)
Bull Put Spread, Bull Put Vertical
Outlook: Bullish. The stock must rise by some amount to show a gain.
buy Put 1 strike lower than current stock price, sell Put 1 strike
higher than current stock price.
when: stock rises.
Gain: initial credit.
when: stock falls, or does not rise.
Loss : limited to difference in strike prices x number of shares
represented - initial credit.
Calculation: Short Put strike - initial credit.
compared to stock: limited risk, less capital needed, greater leverage.
compared to stock: gains are limited to the upside if stock rises
more than the sold strike, no dividends.
after entry, increasing implied volatility is positive if the stock
falls, but negative if the stock rises.
after entry, the passage of time is positive if the stock rises,
but negative if the stock falls.
Requirement: difference in strike prices x number of shares represented.
see the Vertical Spread Strategies page and
Bull Put credit spread
Equivalent: Long Stock plus Long Put plus Short Call. (A "collar".)
Bull Put can be used if you are bullish on a stock, but want to have
a better chance of a gain than buying an ATM Long Call. The ATM Long
Call must rise by the amount of the debit, this Bull Put has a gain
with any rise in the stock price.
- The gains
are limited to the upside, so you don't want to be "too" bullish.
- Over the
range of strike prices used, the position will gain or lose a dollar
amount nearly the same as holding a stock position.
this is a bullish position, the trader is expecting the stock to rise.
If the stock falls instead, the trader would be wise to cut his losses
short. Using the example graph, if the stock drops to about $47.50 at
any time, the loss would be about $200, and it is probably best to take
it. Just sitting and waiting could likely result in the maximum loss
of more than twice that amount.
- If the
stock rises most of the way to the sold strike, the trader should stick
with the position. As the option graph shows, just the passage of time
is a benefit at any stock price near the sold strike.
- If the
stock rises over the strike you sold by expiration, both puts will expire
worthless and you will not need to trade out of the position.
- It is
not usually recommended to adjust one part of a Bull Put. If you take
a trading profit on the short puts when the stock rises for instance,
you are actually increasing your maximum risk. You might think you will
sell the puts again the next time the stock drops, but what if it doesn't?
- It is
possible to roll the entire bull put to lower strike prices if the stock
drops, but that really amounts to closing one trade at a loss and opening
another trade in hopes of a gain. Plus, the stock has not behaved bullishly
yet you are taking a second bullish position.
- If the
stock rises to near the sold put strike with expiration near and you
have made 80% or so of the total possible on the short puts, you can
roll everything out to the next month, and higher strike prices, if
you are still bullish on the stock.