Bull Put Spreads


The Bull Put Spread (BPS) is a moderately bullish strategy.  The strategy is a credit spread, which means you will not have a cash outflow from your account when you initiate this trade.   A credit will enter your account once the trade is filled, and that credit is the maximum reward.  This trade has limited downside and involves a combination of two legs (sides).  In the case of a BPS, the investor will sell a higher strike put, and buy a lower strike put for protection, on the same underlying with the same expiration.

Let's look at an example....  Assuming BVF is trading at $20.00 and an investor is moderately bullish.  To enter a BPS, an investor would:

Sell 10 Oct $20 BVF Puts @ 1.50
Buy 10 Oct $17.50 BVF Puts @ $0.20 for a net credit of $1.30 per spread or $1,300.00 on this trade.

The investor would receive a credit of $1,300.00 into the account. This trade is subject to a margin requirement (check with your broker for the exact amount), meaning you will have to have cash or margin excess in your account to enter this trade.  The maximum risk on this trade is...The difference between strikes ($2.50), minus the net credit received ($1.30) equals your entire risk ($1,200.00).

Ideally the investor would like BVF to remain at or above $20.00 at expiration of this trade. If that is the case, both sets of option will expire worthless (this is a good thing!), and the investor will keep the entire credit.  If the investor wishes to get out of this trade for any reason prior to expiration, they would simply buy what they sold, and sell what they bought to do so.  More specifically, this trade can be offset by buying back the Oct $20 Puts and selling the Oct $17.50 Puts.