Bull Put Spread

The Bull put spread allows you to make money as a stock rises. It is more conservative than buying a stock or a call because the stock does not necessarily need to go up for you to make money.

It works by buying an out of the money put and selling a put with a higher strike price. The money you make from selling the higher strike price minus what you spend from buying the lower strike price is your gain. If you buy the $50 put for $1 and sell the $55 put for $2 your gain is $1.

Max Gain

Unlike buying the stock or buying the call option, your gains are limited with this strategy. In the above example you can only make $1 from the trade even if the stock skyrockets.

Max Loss

There is also a maximum you can lose with a bull put spread. The maximum you can lose is the difference between the spreads minus the premium you made. In the above example you bought the $50 put and sold the $55 put.

The difference between them is $5 and you made $1 from selling it. So the max loss is $4.

Expiration and Exercising

All spreads will either expire worthless or they will be exercised. In a bull put spread you want the stock to stay above the strike price of the put you sold by expiration. If it does the spread will expire worthless and you receive your Max Gain.

If the spread falls below the strike price of the put you sold it will be exercised. In which case you will lose your receive your Max Loss.

Probabilities

This spread has a high probability of being profitable if you sell out of the money. Your stock could go up, sideways, or down a little and you would still make money. It only needs to stay above the strike price of the put you sold by expiration.