What is a bull-put credit spread?
Best Answer
178 points
KenTrester answered one year ago …
A bull-put credit spread is a bullish position in which you want the stock price to stay above the upper strike price of the spread.
A credit spread involves writing (selling to open) an option and purchasing (buying to open) an option at a different strike price in the same underlying security. The position, or "leg," of the spread trade that you sell gives you a cash credit to your trading account. The option you buy limits your risk and lowers your margin requirement for the trade.
In a credit spread trade, you collect more money on the leg you write than you spend on the leg you buy, so you are getting paid to enter the trade! For maximum profits, you want both options involved in the spread to expire out-of-the-money. But regardless of what happens to the options, the money you receive for opening the position is yours to keep.
For the purposes of illustration, let's say you want to institute a bull-put spread on General Electric (GE). (Again, this is for illustrative purposes only).
Using a spread order through your brokerage, you could sell to open the GE Dec 12.50 Puts for about 45 cents and buy to open the GE Dec 7.50 Puts for about 4 cents, for a net credit of about 41 cents per contract.
As long as GE stock is trading above 12.50 at December expiration, you would get to keep that 41 cents from the spread ($41 per contract).
I suggesting using an auto-stop order to close bull-put spreads if the underlying stock closes above the highest strike price, in this case $12.50.
If you do not close the position and the GE Dec 12.50 Puts expire in-the-money, you will be obligated to buy 100 shares of GE at $12.50 per share for each put credit spread contract you write.
Answers
2183 points
ChaosNantuko answered one year ago …
This is a stock option strategy where you buy one put, and sell another put with a higher strike price, meaning when you open the position, its for a net credit to your account.
Profit wise, its identical to a bull-call debit spread.
Basically, the put you sell has more value then the put you bought. If the stock goes down below the lower strike price, then at expiration, you have to pay the difference between the strike prices to close the position. If the stock goes up above the higher strike price, then at expiration, both puts expire worthless and you get to keep the premium you received when opening the position.
An example...
lets say XYZ is trading at 100$.
We buy the 95 put, allowing us to sell the stock at 95$, for 2$.
We sell the 105 put, obligating us to potentially buy the stock at 105$, for 8$.
So in total, we net 6$.
If XYZ is under 95 at expiration...
We have to buy the stock at 105, and we can sell it at 95, so we're obligated to deliver 10$ per share. But we took in 6$ earlyer already, so we have a 4$ loss.
If XYZ is above 105 at expiration...
Both puts are useless, and we keep the original 6$.
The margin on this trade would be 10$, minus the 6$ we collect gives us a net investment of 4$ per share. So in this case, if its above 105, we make 150% return on investment. (if its above 105)
Below 95, we'd have a 100% loss (investment of 4$ is lost).
More details: http://www.poweropt.com/bpspreadhelp.asp
