Bull Put Spread TUTORIAL [Vertical Spread Options Strategy]

the bull put spread option strategy is a limited risk strategy that profits when the stock price increases or at least remains above the put spreads strike prices as time passes the bull put spread as one of the four vertical spread option strategies the benefits of the bull put spread strategy include limited loss potential if the stock price Falls and compared to buying 100 shares of stock the loss potential is typically going to be far less significant than the loss potential when buying 100 shares of stock the bull put spread strategy is also a high probability trading strategy meaning the probability of making money on any particular bull put spread position is theoretically above 50% in this video I'm going to visually explain to you exactly how the bull put spread option strategy works we're gonna look at numerous trade examples so you can see exactly how the strategy performs based on various stock price movements and I'm also going to show you how to setup the bull put spread strategy on the tasty works desktop trading platform stay tuned the bull put spread is an option strategy that profits when the stock price remains above the put spreads strike prices as time passes the stock price can even decrease a little bit and the strategy can still make money we'll talk about that in just a moment other names for the bull put spread strategy include a short put spread put credit spread or simply selling a put spread the bull put spread consists of two options transactions the first one being selling a put option and the second one being purchasing another put option at a lower strike price so to create a bull put spread you sell a put option and buy another put option at a lower strike price and the same expiration cycle as the put option that you sold compared to just selling a put option buying a put option at a lower strike price against the put that you've sold reduces the loss potential of the position which means the risk is far less significant than if you were to just sell a put option all by itself however by purchasing a put option against the put that you've sold you reduce the amount of option premium that you collect when entering the position which means you have less profit potential compared to just selling a put option all by itself let's take a look at a hypothetical short put spread position look at the expiration profit and loss graph so you can see exactly how the strategy is expected to perform based on various stock prices at expiration in this example let's say the stock price is right at $90 per share at the time of entering the put spread position I'm going to create a bull put spread from the following options to construct a bull put spread position I'm going to sell the 90 put for five dollars and nine cents and I'm going to purchase the 85-foot for two dollars and 84 cents since I collected five dollars and nine cents for selling the 90 put and I paid two dollars and 84 cents for purchasing the 85-foot the net premium collected in this example is two dollars and twenty five cents in options trading if you collect more premium than you payout when you enter an option position which is the case with this put spread it is said to be entered for a net credit in this example a trader might say that they sold the 90 85-foot spread for a net credit of two dollars and twenty five cents let's take a look at the expiration profit and loss graph for this particular put spread position here we're looking at the profit and loss figures for this particular put spread position based on various stock prices at expiration but where do these profit and loss figures come from the maximum profit potential of a bull put spread position is the net credit times the option contract multiplier of 100 in this example the net credit is two dollars and 25 cents and if I multiply that by 100 which is the option contract multiplier I get a maximum profit potential of 225 dollars when selling options or selling spreads the best-case scenario is that the options expire worthless in which case you keep a hundred percent of the premium that you've collected when selling that option or spread in this example if I sell the spread for two dollars and twenty five cents and the spread expires worthless or with a value of zero dollars I will have a two dollar and twenty five cents per spread and when I multiply that by the option contract multiplier of 100 I get a maximum profit potential of two hundred and twenty-five dollars per spread that I sell the maximum loss potential of a bull put spread position is the width of the strikes less the credit received times 100 in case the spread is five dollars wide since I sold the 90 put and I purchased the 85-foot the distance between those strike prices is five dollars since I collected two dollars and twenty five cents for selling the put spread the most the spread can move against me before hitting its maximum value or the width of the strikes is two dollars and seventy five cents if I sell a spread for two dollars and twenty five cents and it increases to five dollars that represents a $2 and seventy five cent increase against me and if I multiply that by the option contract multiplier of 100 I get a maximum loss potential of two hundred and seventy five dollars per foot spread that I sell the break-even price of a bull put spread at expiration is the short foot strike price less the net credit received when entering the trade in this case the short foot strike price is $90 and I collected two dollars and twenty five cents for selling the spread which brings the break-even price to eighty seven seventy five so if I take the short foot strike price of $90 and subtract the net premium received of two dollars and twenty five cents I get a break-even price of eighty seven dollars and seventy five cents now that we've discussed a hypothetical bull put spread example trade let's go ahead and look at some historical bull put spread trades using historical option data so you can see how real bull put spreads have treated in the past based on the specific scenarios that those trades encountered in this example we're gonna look at a scenario where the bull put spread ends up with the maximum profit potential at expiration here are the trade details at the time of entering the trade the stock price was seven hundred and sixteen dollars and three cents the options used in this example had 67 days until expiration to constructible put spread I sold the 700 foot for 30 dollars and 20 cents and I purchased the 640 foot for 12 dollars and 15 cents the net credit in this example is 18 dollars and five cents since I collected 30 dollars and 20 cents for selling the 700 foot and paid twelve dollars and fifteen cents for buying the 640 foot the maximum profit potential of this put spread position is 1805 dollars and that come from the $18.00 and 5 cent credit received times the option contract multiplier of 100 which is one thousand eight hundred and five dollars if I sell this Fred for $18 and five cents and it expires with a value of zero dollars that translates to an $18 and five cent profit per spread and when multiplied by the option contract multiplier of 100 I get a profit of one thousand eight hundred and five dollars the maximum lost potential in this case is four thousand one hundred and ninety five dollars and that's because the spread width is $60 and I sell the spread initially for 18.5 cents if I sell a 60 point wide spread for 18.5 cents the most the spread can increase against me before reaching its spread width of $60 is forty one dollars and ninety five cents and when I multiply that by the option contract multiplier of 100 I get a maximum loss potential of four thousand one hundred and ninety five dollars per foot spread sold the breakeven price in this example is six hundred and eighty one dollars and ninety-five cents and that's because the short foot strike price is seven hundred dollars and the net credit received is eighteen dollars and five cents if I take seven hundred minus 18.5 cents I get a breakeven price of six hundred and eighty $1.95 if the stock price is right at six hundred and eighty one dollars and five cents at expiration the 700 foot will have eighteen dollars and five cents of intrinsic value and the six hundred and forty foot will expire worthless and therefore the seven hundred 640 put spread will have an expiration value of eighteen dollars and five cents if the stock price is exactly at six eighty one ninety five let's take a look at how this trade performed on the very top of the chart we're looking at the price changes of the stock price relative to the strike prices of the put spread on the bottom of the chart we're looking at the price changes of the put spread itself over the first twenty two days of the trade the stock price was extremely volatile and the spread had many transitions from profitable territory to unprofitable territory most notably the stock price increased to a value of seven hundred and seventy five dollars at which point the spread had 45 days left until expiration because time had passed and the stock price was nearly $75 above the put spreads strike prices the put spreads value fell to about six dollars with an initial sale price of 18.5 cents the spreads decreased to six dollars represents an unrealized profit of twelve hundred and five dollars per spread if the trader wanted to take that profit at that moment they could buy back the spread for six dollars at that moment in which case they would realize a profit of one thousand two hundred and five dollars per spread but let's say the trader held the position through expiration the stock price quickly reversed directions and fell from 775 dollars to nearly six hundred and eighty two dollars which meant the put spread was in the money with a significant stock price decrease the spreads value went from six dollars at forty five days to expiration to twenty five dollars at thirty eight days to expiration with an initial sale price of 18.5 cents the spreads value at 25 dollars represents a loss of six hundred and ninety five dollars per spread fortunately the stock price recovered and ended up being above both put spread strike prices at the time of expiration which means the 700 640 put spread expired completely worthless and realized the maximum profit potential of one thousand eight hundred and five dollars for a trader who sold the spread for eighteen dollars and five cents I personally love this example because it demonstrates that when you trade options it's very rare to have a situation in which the profitability of your position is linear when trading options it's very common to have many moments throughout a trades duration where the position is not profitable but later on becomes profitable and that's just the nature of trading in general in this next trade example we'll look at a scenario where the bull put spread ends up with the maximum loss potential at expiration here are the trade details at the time of entering the trade the stock price was at 109 dollars and 96 cents the options used in this example had 46 days until expiration to construct the bull put spread I sold the 110-foot for nine dollars and 22 cents and I bought the 95-foot for three dollars and 67 cents the net credit in this example is five dollars and 55 cents since I collected nine twenty two cents for selling the 110-foot but paid three dollars and sixty seven cents for buying the ninety five foot the maximum profit potential in this example is five hundred and fifty five dollars which comes from the five dollar and fifty five cent net credit times the option contract multiplier of 100 if I sell a spread for five dollars and fifty five cents the best-case scenario is that the spread expires worthless in which case I have a five dollar and fifty five cent profit per spread and when I account for the option contract multiplier up 100 that profit comes out to five hundred and fifty five dollars per put spread that I sold in this case the maximum loss potential is nine hundred and $45 per spread which comes from the fifteen dollar strike with less the five dollar and fifty five cent net credit received if I sell a spread for five dollars and fifty five cents and that spreads value increases to fifteen dollars that represents a nine dollar and forty five cent move against me and when I account for the option contract multiplier of 100 I get a loss of nine hundred and $45 per spread the expiration break-even price of this position is 104 forty five that comes from the short put strike price of a hundred and ten dollars less the net credit received of five dollars and fifty five cents which comes out to 104 forty five if the stock price is exactly at 104 forty five at expiration the 110-foot will be worth five dollars and fifty cents and the ninety five foot will be worthless resulting in the 110 ninety five put spread having a value of five dollars and fifty five cents at expiration which is exactly the same price that I collected for it when I initially entered the trade let's see what goes wrong with this position as we know the bull put spread is a bullish trading strategy that profits when the stock price increases or at least remains above the put spread strike prices as time passes it makes complete sense then that this trade did not make any money because over the entire duration of the trade the stock price was decreasing with the stock price completely below both put spreads strike prices at expiration the put spread in this example expired worth its maximum value of fifth dollars at expiration which translates to the maximum boss potential of nine hundred and forty five dollars for any trader who sold the spread for five dollars and fifty five cents now that we've looked at bull put spread example trades that have made and lost money what does it look like to setup a bull put spread using real trading software for this example I'm gonna hop onto the tasty works desktop trading platform and show you exactly how to setup a bull put spread using the platform be sure to check the link in the description to learn how you can get one of our paid courses completely free when you open and fund your first tasty works brokerage account using the project option referral code I've just opened up the tasty works trading platform and currently I'm looking at the chart of IWM which is the Russell 2000 ETF as you can see here the Russell has rebounded a little bit from this decline that it recently experienced and it bounced from a price of around a hundred and forty five dollars now if I was a technical trader and I thought that this support level so to speak would hold up in the future one thing I could do to potentially profit from that would be to sell a put spread to start that process I'm going to open up the trade tab and now I have to choose an expiration cycle to trade for this example I'm gonna go up to the seventy one day expiration cycle which is August twenty nineteen and all I have to do is click on the expiration cycle to show all the options within the August twenty 19 X per Asian cycle that have 71 days to go so to start my bull put spread I'm going to click on the bid price of the 145-foot and this queues up in order to potentially sell this put option but this is not an actual trade yet because I have not sent the order this is just merely setting up the position so if I want to sell the 145 put option let's say I want to sell a $5 wide put spread in which case I would have to purchase the 140 put which has a strike price that is $5 below the short strike of 145 so it's a queue up in order to buy the 140 put I'm going to click on the ask price of the 140 put and now I have an order queued up for the 145 140 bull put spread in IWM that expires in 71 days the current mid price of this spread one dollar and thirty cents and that translates to a maximum profit potential of a hundred and thirty dollars and a maximum loss potential of about three hundred and seventy dollars profit potential relative to the loss potential may seem a bit illogical to you but this is just telling us that this is a very high probability strategy since the profit is less than the loss potential and on the bottom left here it says the probability of profit is sixty-six percent which means that if I sell this put spread for one dollar and thirty cents and I hold it through expiration in 71 days in theory there's a sixty-six percent probability that I will have at least a one penny profit on this particular trade now if I wanted to visualize the risk profile of this position I could go to the curve view click on analysis and then this will show me the expiration risk profile graph for this particular bull put spread position so this little green flag is the current price of IWM which is right around one hundred and forty nine dollars and as we can see as long as IWM remains above a hundred and forty five dollars through expiration this put spread will expire worthless and therefore the maximum profit potential will be realized unfortunately if the stock price decreases and IWM is below one hundred and forty dollars in 71 days this put spread will take on its maximum value of $5 which is the width between the strikes and if this spread increases to five dollars since I sold it for a dollar and thirty cents my loss per spread will be three hundred and seventy dollars the breakeven price of this spread is going to be the short put strike price of 145 less the entry credit of one dollar and thirty cents which comes out to 143 seventy I hope those tips were helpful and that you have a much better understanding of how to set up a bull put spread using whatever brokerage software you're currently using but especially if you're on tasty works to wrap up this video I'm gonna go over a couple frequently asked questions related to the bull put spread strategy the first question is can you close a bull put spread position before expiration or do you have to hold it through expiration once you the trade the answers that you can always close an option position before expiration no matter what you're trading when trading a bull put spread or selling a put spread the trade is to sell a put option and buy a put option at a lower strike price so to close the bull put spread position all you have to do is buy back the put that you sold and sell the put that you purchased by doing so you will effectively lock in whatever profit or loss the spread has at the time of closing the trade for example if you sell a put spread for seven dollars and sixty cents and the stock price increases over a couple weeks and the spreads value falls to four dollars if you buy back the spread for four dollars you will lock in a profit of three dollars and sixty cents per spread since you sold the spread for seven dollars and sixty cents and bought the spreads back for four dollars in that case your actual profit would be three hundred and sixty dollars per put spread that you sold and later purchase back for a lower price the next question is can you hold a short put spread position through expiration if the options are in the money and the answer is that you can hold a spread through expiration if the options are in the money and in the case of selling a put spread if the stock price is completely below both put spread strike prices meaning both puts are in the money if you hold those put options through expiration you will not end up with any share position but your brokerage firm will charge you exercise and assignment fees which in most cases not going to be a situation you want to be in however if only the short puts are in the money at expiration and the long puts are out of the money which essentially means the stock price is in between the short put and long put strike prices at the time of expiration you will end up with a stock position if you hold those shortcuts through expiration since you have eight short put options and you let them expire in the money you will end up with eight hundred shares of stock if you do so that's a wrap on the bull put spread option strategy video everybody I really hope you enjoyed this video and you learn something if you did please give this video a thumbs up and leave a comment down below if you have any feedback or suggestions for future videos be sure to check the links down in the description for additional resource I'm Chris from Project option comm and I will see you in the next video [Music] [Music]

Channel: projectfinance

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Keywords: bull put spread, put spread, bull put spread options strategy, put credit spread, put vertical spread, vertical spread, short put spread, selling a put spread, bullish options strategies, options strategies, options trading, trading, options trading strategies, projectoption, vertical spread options, credit spread options, stock market, options spread, bull put spread example, options trading examples, tastyworks, options

Id: fSMCL5U9M-I

Length: 20min 14sec (1214 seconds)

Published: Wed Jun 12 2019