• Put Bull Spread Trading Strategy

    Put Bull spread trading strategy consists of two Put option positions (One Sell and one Buy) at the same time. Here the trader buys one put option with a lower exercise price XL and sells another put option with a higher exercise price XH. For the first option he pays premium of PL and for the second options he receives premium of PH.

    Here PH > PL, as XH > XL

    Suppose for this case,

    XL = USD 100; XH = USD 150

    PL = USD 10; PH = USD 20

    Current Share Price, S0 = USD 80

    Net Premium Received = USD (20-10) = USD 10

    Maximum Loss happens when the stock price goes lower than the lower strike price range (XL) as here both the Put options will be in the money. The maximum loss will be the difference between the two strike prices minus the net premium received which is = (XH – XL) – (PH-PL) = USD (50-10) = USD 40

    Maximum Profit happens when the share price goes above than the higher strike price range (XH = 150 USD) as beyond that both the put options will be expired and he will generate profit equal to the premium difference (Premium received – Premium paid). Maximum Profit = (PH – PL) = 20-10 = USD 10

    Breakeven price is the share price where the profit stood at 0 and it separates profit from loss. Here the breakeven price would be = 150-10 = USD 140, where loss from sell put option will be same as profit earned from premium. The breakeven price can easily be determined from the table and the chart.

    The following table shows the profit/loss scenarios for different share prices.

    Put Bull Spread

    The below chart shows the profit/loss for the trading strategy option with the movement of the share price.

    Put Bull Spread Chart

    Here we have three graphs

    1. Profit/Loss from Buying Put option at strike price XL
    2. Profit/Loss from Selling Put option at strike price XH
    3. Total Profit/Loss

    Put Bull Spread trading strategy is used when the trader is bullish on market direction. A Put Bull Spread has the same payoff as the Call Bull Spread except the contracts used are put options instead of call options.

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