Put can be used as a credit entry substitute for buying an At-the-Money
option-info and options-graphs sites:
Put , (ATM
strike to 1 strike up)
Bull Put Spread, Bull Put Vertical
Outlook: Very bullish. The stock must rise just to break even. The
stock must rise more to show a gain.
buy put ATM and sell put ITM.
when: stock rises over short put strike - initial credit
Gain: initial credit.
when: stock falls, does not rise, or does not rise enough.
Loss : limited to difference in strike prices - 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 the 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 very bullish on a stock, but want to
reduce the cost of entry compared to just buying an ATM Long Call. This
is especially true if the options have a higher-than normal IV. Just
buying a long call puts you at a disadvantage in terms of the higher
price caused by the higher IV. If you use the Bull Put, you buy a high
IV put but also sell a high IV put, and level the playing field.
- The gains
are limited to the upside, so you don't want to be "too" bullish.
this is a very 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. If the stock falls below the long strike and the time
to expiration drops to just a couple weeks, you can see from the option
graph that the loss will be less than the maximum, and it is probably
best to take it. Just sitting and waiting could likely result in the
- 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 falls below the long strike and you do not trade out of the position
before expiration, it is possible to receive an automatic exercise on
the long put, so you will sell the stock short, and be assigned on the
short put, so you will buy the stock. See the Rules,
Tips, & Techniques page for more.
- 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 falls, 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 is over 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.