What are the characteristics of this option strategy?
Bull put spreads sell one put at a higher strike and buy one put at a lower strike on the same underlying, in the same expiration, for a net credit. This is considered a moderately bullish strategy that assumes the market will move higher in the near-term, or at least stay above the short put strike.
Is this a bullish, bearish or neutral strategy?
This is a moderately bullish strategy since it assumes the market will move higher in the near-term.
Is this a beginner or an advanced option strategy?
This strategy is considered an advanced option strategy and is not recommended for beginners.
In what situation will I use this strategy?
The Bull Put Option Strategy is typically used when an investor has a bullish outlook on a specific security or index but does not want to pay a premium up front and fight time decay the way a long call buyer does. Note that this is a trade-off, not an upgrade: a long call cannot lose more than the premium paid, while this spread can lose the width of the strikes less the credit.
Where does this strategy typically fall in the range of risk-reward and probability of profit?
The risk is defined on both sides, but defined is not the same as small: the maximum loss is normally several times the credit collected. The probability of profit is high, although it can decrease significantly in a bear market. The maximum profit is capped at the net credit. The maximum loss is the distance between the strikes minus the net credit, and it is realised if the stock closes at or below the long put strike. A wider spread brings in more credit and a larger maximum profit, but it widens the maximum loss by more than it widens the credit.
How is this strategy affected by the greeks?
The position benefits when the underlying price increases and is negatively impacted when it decreases. This translates to a “net positive delta”, which is a measure of how much the option price will change in response to changes in the stock price. However, it’s worth noting that the change in option price is generally less than the corresponding change in stock price. Additionally, because the bull put spread involves both a short put and a long put, the net delta remains relatively stable despite fluctuations in the stock price and time to expiration. This is referred to as a “near-zero gamma”, which estimates how much the delta of a position changes in response to changes in the stock price. As such, a deep understanding of these option metrics is critical when evaluating the suitability of a bull put spread or any other investment strategy.
In what volatility regime (i.e VIX level) would this strategy be optimal?
This strategy is best used when market volatility is medium to high (VIX level above 20).
How do I adjust this strategy when the trade goes against me? And how easy or difficult is this strategy to adjust?
Adjusting a Bull Put Option Strategy when the trade goes against you is relatively easy, as it involves closing the short put spread and replacing it with a long call spread or a long put spread.
Where does this strategy typically fall in the range of commissions and fees?
Because the position is only two legs, commissions and fees are typically relatively low. Commission charges can range between one and three dollars per contract and margin requirements can vary depending on the broker.
Is this a good option income strategy?
This is a common option income strategy: the credit is collected up front and the long put caps what a bad move can cost. Size it knowing that the capped loss is still larger than the credit, so one loss can erase the credit from several winning expirations.
How do I know when to exit this strategy?
It is important to have an exit plan in place before entering a Bull Put Option Strategy. You should have an predetermined price target or time frame that signals when to exit the trade. If the trade is not profitable within that timeframe, it is best to get out and take the loss.
How will market makers respond to this trade being opened?
Market makers do not take a view on your trade. They quote both legs, hedge the delta they take on, and earn the bid-ask spread, so a two-leg vertical in a liquid name is usually filled without difficulty.
What is an example (with calculations) of this strategy?
Let’s look at an example of a Bull Put Option Strategy. Let’s say a trader is bullish on the stock XYZ and expects the stock to go up in the near-term. The trader opens a Bull Put Spread by selling one put contract at the strike price of $30 and buying one put contract at the strike price of $25. The maximum profit potential of this trade is equal to the net credit received, which in this case is $50. The maximum loss potential of this trade is the difference between the strike prices less the net credit received, which in this case is $500 - $50 = $450, and it is realised if XYZ closes at or below $25. The breakeven is $29.50, the $30 short strike less the $0.50 per share credit, so the trade makes money above $29.50 and reaches the full $50 at or above $30. Using Iron Condor Excel Template you can easily calculate the risk-reward of this trade and make the required adjustments if needed.
How MarketXLS can help?
MarketXLS is a market data and stock analysis software that provides real-time streaming quotes, news, options chains, and much more. Using vertical options spread sheet you can easily track and analyze your Bull Put Option Strategy and you can also set it up to make recommended adjustments when the trade goes against you. In addition, MarketXLS comes with an array of advanced features that make it an indispensable tool for any risk-tolerant investor.
Here are some templates that you can use to create your own models
Bull Put Spread Option Strategy
Iron Butterfly Option Strategy
Iron Condor Option Strategy
Short Put Ladder
Box Spread
Short Box
Search for all Templates here: https://marketxls.com/templates/
Relevant blogs that you can read to learn more about the topic
Maximizing Profits with a Bull Put Spread Strategy
Bull Put Options Strategy
Vertical Options Spread (Using Marketxls)
Trading In Bull Put Spread Options Strategy (Using Excel)
Double Diagonal Option Strategy