Bull Put Option Strategy

What are the characteristics of this option strategy?

A Bull Put Option Strategy is an options trading strategy in which the investor buys 1 out of the money put option and sells 1 in the money put option. This strategy is considered a moderately bullish strategy that assumes the market will move higher in the near-term.

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 not necessarily willing to commit to a long options position due to the higher risk associated with it.

Where does this strategy typically fall in the range of risk-reward and probability of profit?

This strategy is considered low to medium risk with a moderate risk-reward ratio. The probability of profit with this strategy is high, although it can decrease significantly in a bear market. The maximum profit one can expect is constrained by the net credit. It follows that the maximum loss is limited to the spread minus net credit. As such, a wider spread can lead to higher profit potential, but also raises the breakeven point.

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?

Given the low risk involved with this strategy, 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 strategy is a good option income strategy, as it generally has a limited risk while providing a moderate return.

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 typically respond positively to Bull Put Option trades as they are generally low risk and provide a reliable income source.

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 premium received, which in this case is $50. The maximum loss potential of this trade is equal to the difference between the strike prices, which in this case is $500. 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