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:
| 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) |
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.
