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What is a Bull Put Spread? How to Calculate Profit and Loss in Bull Put Spread Strategy?

Welcome back to our series on Option Trading Strategies. In the Previous article we have discussed Bull Call Spread, a simple debit strategy you could use when you have a moderate bullish view on the market. Bull Put Spread is also a simple Option Strategy consisting of two Put option legs or trades, which you could use if you have a moderate bullish outlook on the market.

Bull Put Spread is a Net Credit Strategy, which means you get to collect a premium right upfront when you execute the trade and get reflected in your total margins. What makes Bull Put Spread a bit more lucrative than the Bull Call Spread is the slightly higher profit potential it could offer owing to a higher premium value on Put side strikes.

Why Bull Put Spread?

When you execute the right strategy at the right time, you could fetch the maximum returns from the market. If you have been in the market for a while you might have noticed that the Put Option Strikes Premiums will be slightly or sometimes significantly higher than the Call Option Premiums even though both are at the same gap from the Spot Price. For instance, Nifty is at 18000, a call option at 18200 is trading with a premium of 50/- whereas the Put Option at 17800 is trading at a premium of 80/- even though both strikes are 200 points away from the spot price. And such a scenario happens quite a lot of times in the market, you know the options premium takes volatility into account which is basically a fear factor in the market. The probability the market could fall suddenly is a bit higher than it shooting up higher, because of which the Put options on a side-wise and bearish market trades at a slightly higher premium compared to call options of the same far point strikes from the spot.

So when you feel that the market could move up from a support level and Put Options are trading at a higher premium, then a Bull Put Spread might be more rewarding than a Bull Call spread. A Bull Put Spread consists of two Put Options Legs and are,

  1. An ITM Put Option Sold
  2. And an OTM Put Option Bought

Always remember that both the legs should be of same expiry and same underlying traded in equal quantities. 

As we are Bullish on the Market, we sell an ITM Put Option above which we expect the market to expire. By selling the ITM put option we are collecting a higher premium, and we Buy an OTM Put Option to minimise our potential Loss. A Portion of the Premium we collected from selling ITM Put Options is utilised for Buying an OTM Put Option, and the remaining premium left with us will be our maximum profit on the trade. Thus the trade becomes a Net Credit Strategy as we have already collected the Full Premium.

Spread of the Trade = ITM Option Strike – OTM Option Strike

Net Credit = Premium Collected from Sell Leg – Premium Paid on Buy Leg

Max Profit = Net Credit

Breakeven = Selling Strike – Net Credit

Max Loss = Spread – Net Credit

Let Us Do The Math

Let’s say Nifty is at 18000 and we have a moderate bullish view on the market and we expect Nifty to close above 18200 by expiry. So keeping that view in mind we sell a 18200 PE at a Premium of 220/- and Buying a 17900 Put Option at a Premium of 70/-. The Details of the trade are as follows,

Nifty Spot = 18000 [Lot Size of Nifty = 50]

PE Sell Leg = 18200 at a Premium of 180/- Rs = 220 x 50 = 11000/- [Credit]

PE Buy Leg = 17900 at a Premium of 70/- Rs = 70 x 50 = 3500/- [Debit]

Net Premium Received = 220 – 70 = 150/- = Net Credit

Spread = Sell Strike – Buy  Strike = 18200 -17900 = 300

Max Profit Per Lot = [220 – 70] x 50 = 7500/- Rs

Max Loss Per Lot = Spread – Net Credit = [300 -150] x 50

    = 150 x 50 = 7500/- Rs.

Breakeven = Sell Strike – Net Credit = 18200 – 150 = 18050.

Any Risks??

Let’s dive deep into the trade and analyze it in detail to get the real hang of the trade. The market is trading around 18000 and assume the market has fallen a bit and took a support at 18000. We are expecting the market to go no further downwards, charts, technical analysis and multiple indicators show a higher probability of Nifty going up from the spot price.And we expect that Nifty can go above at least 18150 by expiry, keeping that view in mind and noticing higher premiums on the Put side, we sell 18200 Put option at a Premium of 220/- Rs for an amount of 11000/- in total for a Lot. To prevent the complete loss of 11000/- if the trade goes against us, we decided to buy an OTM Put option at 17900 for a Premium of 70/- Rs at a sum of 3500/- Rs so that our maximum loss will be limited to 7500/- Rs. We have collected a total premium of 220/- from the sell side and Paid 70/- on the buy side, so a net total of 150/- premium per lot or 7500/- Rs is the maximum profit which we could make from the trade, if the market moves as per our view. 

The Net credit of the trade is 150 Points, Our Put option sell leg is 18200 and as we have collected 150 points as credit, 18050 becomes our Breakeven point below which we will incur loss. But as we have a moderate Bullish view on the market, we expect it to close above our breakeven point by expiry and give us good returns. With every point movement of the Nifty above 18050 we are profitable with the maximum profit to be fetched if the market is above or at our Put Option selling strike of 18200. The below table and Payoff graph will help you to get a clear view of the Bull Put Spread Strategy.

Buy Leg IVBuy Leg PremiumBuy Leg P/LNifty Spot at ExpirySell Leg IVSell Leg PremiumSell Leg P/LCombined P/L

Hope You have got a good understanding of the Bull Put Spread Strategy, and the favourable market conditions to deploy the same to yield the best results. Always trade a strategy which supports your views on the market and your risk management criteria in a disciplined manner, so that you could succeed in your trading journey.

We are winding up this chapter here, in the upcoming articles we could learn the rest of the common strategies used in various phases of the market…

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