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.
The below chart shows the profit/loss for the trading strategy option with the movement of the share price.
Here we have three graphs
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.