Bullish Option Strategies » Bull Put Spread

When your feeling on a stock is generally positive, bull spreads are nice low risk, low reward strategies.

One way to create a bull spread that you might not immediately consider is by using put options at or near the current market price of the stock.

Example

If you have a bullish short-term feeling about Coca Cola Co. (KO) when it is trading at $54.14, you might put on a bull put spread by selling the 55 put for $2.55 and buying the 50 put for $0.85. In this case, the maximum profit would be the $1,700 you received when you initiated the position.

The maximum loss would be the difference between strike prices less the $1,700 credit you received for putting on the trade. In this example, the maximum loss would be $3,300 (((55 - 50) x 1,000) - $1,700). For margin purposes, however, the maximum loss is considered to be the difference between strike prices-in this case $5,000-because that is the amount that must be available should the position reach a maximum loss.

To see how this works, consider the following:

Option purchase example
KO trading @ $54.14
Sell 10 KO AUG 55 Put @ $2.55 ($2,550.00)
Buy 10 KO Aug 50 Put @ $0.85 $850.00
Cost of Trade ($1,700.00)

Bull put spread example graphicBull put spread example graphic

If you like the idea behind the bull put spread, be sure to check out bull put spreads and bear put spreads. These can be comparable strategies depending on your objectives.

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