BULL PUT SPREAD
Bull put spread, As the name suggesats, Bull means the market is bullish and Put spread that is, has been created by combining put options. In this strategy “At the money” or “In the money” Put option, we have to sell & “Out the money” put option, we have to buy. So if there is any decline in the market, then huge losses can be saved, but if the market goes up even a small upside movement, then we get to see more profits. So the position created in this way is called “Bull Put spread”.
Important key factor
- Buy one put option at a higher strike price.
- Sell another put option with a lower strike price.
- Both options have the same expiration date and same index.
What is the advantage of Bull put spread strategy?
This strategy is more beneficial if used a day before the expiry, but if there are more days left before the expiry then it is not very beneficial. If we have left the call option to make a profit but require a fund margin, then the fund margin can be met by buying the “Out the money” put option, hence this strategy is also is used to.
There are some good reasons to consider this strategy:
- Limited risk: You know the most you can lose amount.
- Cheaper than buying the “Out the money” put option.
- Can make money even if the stock price doesn't move much anywhere.
Disadvantages of Bull Put Spreads
Of course, there are also some disadvantages:
- Limited profit potential.
- You need to be right about the direction of the stock or index.
- Requires more capital than just buying a put option.
How to make “Bull put spread’?
“Bull Put spread” Let us understand briefly, for example, we will take the help of the NSE Nifty option chain
As shown in the option chain above Nifty Index is trading at 24548, whereas the Nifty 24550 is “At the money”, If i expect that the market will not go down from here. But even, if the market does not go up much, then I will sell the 24550PE option at ₹144 and buy “Out the money” put option 24400PE at ₹91, so that if there is a decline in the market, I do not suffer much loss, by doing this. If there is a rise in the market then the price of 24550PE will reduce. Even if there is not much momentum in the market and the market closes above 24550, the price of 24550PE will remain very low, due to which we will only make a profit.
Nifty 24550PE price will be zero from ₹144, we will get profit full premium price and Nifty 24400PE also will be zero that is buying and we will lose ₹91.
NOTE:- To make a profit in bull put spread , first we have to create a buying position, then we create a selling position, but when we have to exit the position, we first square off the selling position and then square off the buying position.
What will be the target and stoploss when creating the position and how much money will be required?
(PAID PREMIUM) BUY POSITION = Premium price of 24400PE at ₹91
(RECEIVED PREMIUM) SELL POSITION = Premium price of 24550PE at ₹144
Total premium = 144-91= 53 (MAX PROFIT)
Strike difference = 24550-24400 = 150
Option price difference = 144-91 = 53 (150-53= 93 (MAX LOSS))
As mentioned above sell Nifty 24550PE option at ₹144 and buy the Nifty 244000PE option at ₹91. In which the maximum profit will be only 53 points, but if the market does not go according to us, then there will be a loss of 91 points. So Conclusion Bull Call Spread is better than Bull Put spread.
Capital required for bull put spread:
In BULL PUT SPREAD, both the profit and loss are predicted in advance.
To create a Bull put spread Nifty and Fin Nifty option requires a fund of 35-40K, while the Bank Nifty option requires a fund of 45-50K and also depends on the strike price, lot size, and days left to expiry. This means the funds used little by little keep increasing or decreasing.