Bull Put Spread Options Strategy (Best Guide w/ Examples)

[Music] what's up everybody Chris here for project option and in this options trading strategies of video we're going to talk about the bull put spread so if you're familiar with the short put strategy we're going to talk about a strategy that is similar to that but has a little bit less risk and slightly less profit potential so let's go ahead and get right into it so let's start with the bull put spread strategy characteristics so the bull put spread is actually sometimes referred to as a short put spread or a put credit spread all these theory things are the same thing they're just different names for the same strategy so the bull put spread strategy consists of selling a put and buying a put at a lower strike price so both legs use the same number of contracts and the same expiration cycle so the maximum profit potential of the strategy is the net credit received times 100 and the maximum loss potential is the width of the put strikes that you sell minus the credit received times 100 so don't where we're going to go through in-depth examples for all these things but right off the bat we just need to define some of the strategies characteristics so at expiration the break-even price of the short put spread strategy is the short put strike minus the credit received now the estimated probability of profit on any bull put spread trade depends on these strike prices that you sell so the estimated probability of profit is actually greater than 50% for out-of-the-money put spreads that you sell now the estimated probability of profit is closer to 50% for at the money put spreads and is less than 50% if you sell an in the money put spread now after expiration you may have a resulting position if the spread expires in-the-money so if both options are in the money so if the short put and the long put are in the money no stock position is taken after expiration because the exercise and assignment of the short put and the long put offset each other and the spread just essentially settled to its final and you don't take on stock position however if only the short put is in the money you will be assigned on that short put at if you hold it through expiration and that short put will expire to plus 100 shares of stock / short put contract now ad in terms of assignment risk if you're short put spread is deep in the money since you have a short put position in that spread you have the risk of being assigned a hundred shares of stock / short put if someone exercises that option that you're short now that's only really going to happen if you know the stock price is well below your short put strike and the short put is trading with very little extrinsic value all right so now that we've discussed the basic strategy characteristics let's go ahead and look at a bull put spread example and then take a look at the expiration risk profile graph alright so let's go ahead and look at an example bull put spread trade so here we have various strike prices and we can see the put price for each corresponding strike price so let's say at the time of these option prices let's say the stock price is trading for ninety dollars and we sell the 90 85 put spread now that means we're going to sell the 90 put and we're going to buy the 85 foot so we're going to sell the 90 foot for five dollars and nine cents and we're going to buy the 85 foot for two dollars and 84 cents now since we collected more than we paid out this is going to result in a net credit for the spread so since we received 509 and we paid out 280 for the net credit in this case is two dollars and twenty five cents now the width of the spread is five dollars since we sold a foot with a strike price of ninety and purchased to put with a strike price of eighty-five there's five dollars between the short put and long foot so we would say the spreads width is five dollars in this case so let's go ahead and take a look at the expiration risk profile graph for this example trait so as we can see here the maximum profit potential is 225 dollars and that's realized if the stock price is at $90 or above $90 at expiration now that's because since we we collected a net credit of two dollars and 25 cents if this entire put spread expires out of the money and the short put and long put expire worthless we keep that $2 and 25 cent credit now the standard option multiplier is 100 so since that we collected two dollars and 25 cents on that spread that actually results in a credit of two hundred and twenty five dollars that we can potentially make now in regards to losses we know that the maximum loss potential in a short put spread is the width of the the put strikes less the credit receive two times 100 so in this case we have a $5 wide foot spread and we collected two dollars and 25 cents for that spread so five dollars minus 225 gives us two dollars and seventy-five cents that we can lose on the spread now if we multiply that two dollar and seventy-five cent loss times 100 we get to a maximum loss of 275 dollars now that maximum loss occurs if the stock price is at or below eighty five dollars at expiration so at or below our long put strike price now that's going to happen that's going to result in a maximum loss of two dollars and seventy five cents because the stock price is below eighty five dollars at expiration this short 90 85 foot spread is going to be worth five dollars now since we sold it for two dollars and twenty five cents if its value increases to five dollars we're going to be out two dollars and seventy five cents per spread which is a maximum loss of two hundred and seventy five dollars per spread now the break-even price is 87 75 now that comes from the short put strike price of $90 less the two dollar and twenty five cent credit we received which gives us 8775 so if the stock price is right at 87 75 at expiration we're going to break even on this trade because this short put the short 90 put will be worth two dollars and twenty five cents and the long 85-foot will expire worthless so if we add those two values together to 25 plus zero we get a spread value of two dollars and 25 cents so since we sold the spread for two dollars and 25 cents if it's worth two dollars and 25 cents at expiration we break even so this is just the expiration risk profile graph for this particular put credit spread all right now that you know the basic characteristics of the bull put spread and you know the expiration risk profile graph let's go ahead and take a look at three example trades and look at how a short put spread performs through time because you know the expiration risk profile graph tells you what will happen at expiration but a put spread will change value through time and if you're shorter put spread you could potentially manage that trade early so let's go ahead and take a look at how a short put spread performs through time as the stock price is changing so here's the setup the initial stock price is 109 96 and we're going to sell the 110 put and by the 95 put expiring in 46 days now we're going to collect nine dollars and 22 cents for the 110 put and we're going to pay three dollars and 67 cents for the 95 foot so our net credit in this case is five dollars and fifty five cents now just one more thing the spread width is 15 dollars in this case because we're selling the 110 foot and we're buying the 95 foot so there's 15 dollars between the put strikes so our breakeven price in this case is the short put strike price of 110 less the $5 and 55 cent credit we received which brings our breakeven price to 104 45 now the maximum profit potential on this trade is the net credit of 555 times 100 which is five hundred and fifty five dollars per foot spread now the maximum loss potential is the $15 wide put strikes - 555 we received in credit times 100 which brings our maximum loss to 945 dollars so we sold the foot for who filled the put spread for five dollars and fifty five cents the most the put spread can be worth at expiration is $15 which means if we sell it for 555 and it goes to $15 our loss will be nine hundred and $45 per spread so let's go ahead and take a look at how this short put spread performs through time as the stock price is changing so in the top part of this graph we're looking at the changes in the stock price relative to the short put strike price the long foot strike price and the put spreads breakeven price and in the bottom part of the graph we're looking at the price of the one 1095 foot spread and any corresponding profits or losses as the spreads price is changing so as we can see here the stock price rises initially and you know that means the spread the short put spreads price actually decreased a little bit and we can see from that initial increase in the stock price we actually were profiting as a short foot trader because if you sell if you sell a put spread you want the spreads price to decrease which happens when the stock price increases or time passes and the stock prices above the break-even price now as we can see that lift in the stock price did not last long and the stock price actually fell from around $115 all the way down to less than $85 which is well below the foot spread that we sold so as we can see here as the stock price is decreasing the 95 110 foot spread is actually increasing in value now since we sold the spread and it's increasing in value that means we're losing money as the spreads price grows and grows now at expiration the stock price is below the long foot strike price of 95 which means this puts bread actually settles to its maximum value of $15 now since we sold it for 5 dollars and 55 cents and at expiration it was worth $15 we would have incurred the maximum loss potential of 945 dollars in this case now keep in mind that you can always close a put spread early before expiration if you want to lock in a loss or lock in a profit so in this case since we're short than the ten foot and we're along the 95 foot to close this short put spread before expiration we would have to buy back the 110 foot and sell the 95 put in the same transaction at their current market prices so let's say you wanted to sell the spread when it reached $10 so once it reached $10 you could just close that spread and buy it back and it since you sold it for five dollars and 55 cents if you bought it back for ten dollars your loss would have been four dollars and forty-five cents per spread or a loss of four hundred and $45 per spread so now let's look at another example of a short put spread so we just looked at a put spread that did not make money at expiration so now let's move to an example where a short put spread ends up with a partial profit at expiration so here's the setup the initial stock price is to 1928 and we're going to look at selling the 221 90 put spread so we're going to sell the 220 put and we're going to buy the 190 put and both options are expiring in 49 days now we're going to collect $14.60 for the 220 put and we're going to pay four dollars and 60 cents for the 190 put now that gives us a net credit of ten dollars so our breakeven price in this case is 220 that's the short put strike - $10 which is the credit received which brings our breakeven price to 210 dollars so since the initial stock price is 200 19.22 the stock price can actually fall by nine dollars and 28 cents and we can still not lose money on this trade now the maximum profit potential is the $10.00 net credit we received times 100 which is 1,000 dollars and since our our put spread is $30 wide the most we can lose is the $30 width of the foot strikes - the ten dollars we received times 100 which is two thousand dollars so the most we can make is a thousand dollars the most we can lose is two thousand dollars now let's go ahead and see what happens to this put spread over time all right so like before in the top part of the graph we're looking at the changes in the stock price relative to the short foot and the long foot strike price and the break-even price of the short foot spread and in the bottom part of the graph we're looking at the price of the one 9220 bull put spread and we're looking at any corresponding losses or profits as that spreads price is changing so as we can see here in the beginning period the stock price fell from 220 right to 190 so went straight to our long foot strike and consequently that spreads value actually increased from $10 to $20 so since we sold it for $10 once that spreads price reached $20 we're now sitting on a loss of $1,000 per foot spread but the most we can lose is $2,000 so the losses aren't maxed out at that point yet fortunately the stock brakes actually rallied back from 190 and rallied back to 220 now once it hit 220 again we can see that the spreads price was worth slightly less than $10 which means we were sitting on a small profit now the stock price actually ended up falling again and this time just fell below the short put breakeven or the short foot spreads breakeven price of $210 now ad expiration the stock price was in between our short foot strike and to break-even price so in this case we actually did make money on the spread so since the stock price was below the short foot strike at expiration the short put would have expired to plus 100 shares of stock if the short foot spread holder held this position through expiration so that's just something to keep in mind so if you're short a put spread and only the short foot is in the money at expiration if you don't want a long stock position you'll have to close the put spread or close the short foot before expiration all right so we've seen a losing short foot spread and we've seen a partial profit short foot spread so now let's go ahead and look at an example where the short foot spread realizes the maximum profit potential at expiration so here's the setup the initial stock price is 760 no three the strikes we're looking at are the short 700 foot and the long six forty foot expiring in 67 days now we're going to collect 30 dollars and 20 cents for the 700 foot and we're going to pay 12 dollars and 15 cents for the 640 foot now that brings our net credit to 18 dollars and five cents now our breakeven price is the 700 short foot strike lefty 1805 net credit which brings our breakeven price to 681 95 the maximum profit we can make on this trade is the 1805 net credit times 100 which brings our maximum profit potential to 1805 dollars now the put spread in this case is $60.00 wide which means our maximum loss potential is $60 - 1805 times 100 which is four thousand one hundred and ninety-five dollars so we can make around 1,800 dollars and we can lose around $4,200 so let's go ahead and take a look at how this short put spread performed over time as the stock price was changing alright so in the top part of the graph we're looking at the stock price versus the short foot strike price the long foot strike price and the break-even price of the spread and in the bottom part of the graph we're looking at the price of the spread through time and any corresponding profits or losses based on our entry price of 18.5 cents so as you can see here in the initial period the stock price fell towards our short foot strike price rallied back a little bit fell down to the break-even price and then continued to rally from there so as we can see here we did have some losses at some points during this trade but for the most part between 30 days to expiration and 0 days to expiration the stock price rallied and was above our short put strike price at expiration and as such the short put spread expired worthless at expiration which means if we sold the spread for 18 dollars and five cents we kept the $18 and five cent credit which means our maximum profit in this case was one thousand eight hundred and five dollars now you will notice that around 45 days to expiration the stock price surged from you know $700 to around 775 and the spreads value actually fell to around $5 so maybe if you wanted to manage a winner early and you wanted to close the trade for a profit you could have actually bought this short put spread back when it was worth around $5 and you would have locked in a profit around $13 and five cents so just keep in mind that you never have to hold a put spread or any trade to expiration and in this case if you wanted to close the put spread early for profit you could have just purchased the spread back at its current price when it was less than 1805 so you never have to hold the trade expiration you can always close it early so this is just a good example showing that if the stock price doesn't doesn't collapse through your put spread and it's above your short put strike price at expiration both of the options of the short put spread will expire worthless and you will keep the net credit and that means you make the max profit of the spread all right so let's go ahead and go over the main concepts from this video so selling put spreads is also known as bull put spreads or short put spreads or put credit spreads those are all names for the same strategy so selling put spreads is a bullish strategy that has limited profit potential and limited lost potential so compared to just selling a put outright by defining the risk and buying that put against your short put you limit your profit potential a little bit more than you would if you had just sold the put but your risk is significantly less than just selling the put outright so a short put spread is a less risky version of selling a put now the max profit on a short put spread is the net credit received times 100 which occurs when the stock price is above the short put at expiration or significantly above the short put before expiration now the max loss on a short put spread is the width of the put strikes less the credit received times 100 and the max loss occurs when the stock price is below the long put at expiration or is significantly below it before expiration now as we talked about to close the bull put spread a trader can buy back the spread at its current price to lock in profits or losses so you never have to hold the trade to expiration if you don't want to now lastly since you do have a short option in a short put spread you do have early assignment risk now if your short put is deep in the money and it has very little extrinsic value you're at risk of being assigned 100 shares of stock per put contract that you are short so just know that if you're if you're short put spread becomes deep in the money you do have the potential to be assigned early on that short put and that's only really going to happen if the short put has very little extrinsic value remaining well thank you so much for watching this video everybody I hope you enjoyed this video if you found it informative please go ahead and subscribe to our YouTube channel so that you can receive all of our videos as they are released [Music]

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Keywords: bull put spread options strategy, bull put spreads, bull put spread, bull put spread example, bull put spread strategy, bull put credit spread, bull put, credit put spreads, credit put spread, put credit spread strategy, put credit spread, put spreads, short put spread, put spread, projectoption, put vertical spread, bullish, strategies, options trading, options strategies, vertical spread options, options trading strategies, stocks, vertical spread, credit spread

Id: ZTgPxXg41-Y

Length: 20min 52sec (1252 seconds)

Published: Mon Feb 27 2017