How does a Bull Put Spread work?

Trading the bull put spread gives you a higher probability of being correct then if we were to just buy the stock or buy a call.

When you sell a bull put spread you buy an out of the money put and sell a put with a higher strike price. Your profit is the difference between what you sold the higher strike priced put for and what you bought the lower strike price for.

Let’s look at an example. We found a bullish stock in an uptrend and we believe the stock will continue to head up higher. The stock is also sitting at a support level of $53. Instead of buying the stock or a call we decide to sell the bull put spread.

We sell the $50 put for $1.70 and buy the $45 put for $.70. From this we make $1 provided that the stock stays above $50. So the stock can move up, sideways, or even down a little and we would still be able to profit.

If the stock fall down the most we can possibly lose is $4, because the difference in the strike prices we sold was $5 and we made $1 selling premium.

If the stock rallies and we make the majority of our premium in only s few short days it might be worth it to exit the position with a profit rather than wait to make a few extra cents.

For example if the stock goes up to $58 and the spread we sold for $1 is now trading at $.10 it might be better to take that position off and be done with it rather than risking the extra time in order to make $.10.

If you are still bullish on the stock and want to stay in the trade you could do something referred to as rolling your option. This is a situation where you not only buy back your current month’s option contract, but you also sell the next months option.

So in addition to just buying back the option for $.10 and make a $.90 profit we could also sell the next month’s option and make $1 or whatever it is currently selling for.