The bull put spread is a great option for anyone looking to capitalize on the market's bullish sentiment but also worried that another correction could be around the corner. Put options give you the right but not the obligation to sell a stock at a specific price by a certain date. This means you can buy a put option if you think the stock will decline by a certain time. If it does, you can exercise your rights as the owner of that put option and sell it at its strike price. A bull put spread works similarly but with slightly different implications. The bearish counterpart to a standard bull call spread, this strategy involves buying an out-of-the-money put while simultaneously selling an out-of-the-money put with a lower strike price. Let's take a closer look at why and how to implement this strategy in your portfolio.
A bull put spread is, as the name suggests, a bullish options strategy that can be used to take advantage of a rising market. A bull put spread involves buying one put option and simultaneously selling another put option with a lower strike price. With this strategy, you are betting that the underlying asset's price will increase, causing the value of the put options to rise as well. The put options you sell act as a form of insurance against a sudden downturn in the market that would decrease the overall value of your portfolio. If the price of the underlying asset (e.g., a stock) rises, both put options decrease in value — but the one you bought gains in value more than the one you sold. As a result, you end up with a net profit equal to the difference between the two put options. If the underlying asset price falls, the put options you bought will decrease in value more than the ones you sold, and you will lose money. This is what makes the put options with a lower strike price a form of insurance — they will protect you against a significant decrease in the value of your portfolio even though they will lose some value as well.
Bull put spreads are a good option when you want to get involved in the bullish sentiment in the market while also protecting yourself against a correction. A bull put spread will make money if the price of the underlying asset increases, but it will lose some value if the price decreases by a certain amount. This makes it a less risky option than a standard bull call spread, which would lose value if the price decreased. With a bull put spread, you are guaranteed to make at least a little money as long as the price of the underlying asset rises. This strategy is relatively conservative and will only make significant money if the market rises to high levels. This means that it is a good option for investors who are worried about another market correction but still want to profit from the bullish sentiment at the moment. This strategy only makes a small amount of money if the stock price increases a little but loses a significant amount if the price increases a lot. This means it will only profit if the market rises to high levels but will protect you against a large correction.
To create a bull put spread, you will be buying a put option while simultaneously selling another put option with a lower strike price. In the most basic variation of this strategy, you would do all of this with options contracts that have the same expiration date and underlying asset. However, you can also create a bull put spread by buying a put option with one expiration date and selling a put option with a different expiration date. In addition, you can use puts on different underlying assets or different types of options contracts. To create a bull put spread, you first need to decide which stocks or assets you want to focus on. You should select the assets you want to invest in, the assets you want to hedge against, or a combination of both. You then need to decide on the expiration date for your put options and the strike price for each option. You can reference online tools to help you select put options and determine the best strike price. Finally, you need to buy the put options and sell the ones you decide to use for the bull put spread.
The main disadvantage of the bull put spread is that it is a very conservative strategy and only makes a small amount of money if the market rises significantly. This means that it is only a good option for investors who are worried about another market correction but still want to profit from the bullish sentiment at the moment. This strategy only makes a significant amount of money if the market rises to very high levels and will only protect you against a large correction if the market doesn't rise at all.
Suppose you are worried about another correction in the market and want to take advantage of the bullish sentiment. In that case, you could employ one of these strategies to take advantage of rising markets.
- Sell call spreads: This strategy is similar to the bull put spread, but it is a bearish options strategy that will make money if the market declines. It involves selling one call option and buying another with a lower strike price.
- Sell covered calls: This conservative strategy will only make money if the market declines and makes you revenue from the option contracts you sell.
- Buy iron condors: An iron condor is another bearish options strategy that will make money if the market declines. It involves buying put and call option contracts that have different strike prices and expiration dates.
One of the main advantages of this strategy is that you would like both options to expire worthlessly. If that takes place, the trader will not have to pay any commission to exit the positions they have set up. You may also want to think about the second strike being a single standard deviation out-of-the-money at the start. This will grow your chances of success in the trade. But if the chosen strike price is further out of the money, you will get a lower next credit from this spread. As a usual rule, you may also consider taking this strategy about a month from expiration to take the benefits of the increasing time decay as the expiration date comes closer. But this also hinges on the conditions in the financial markets, such as implied volatility and the underlying stock.
This article explored the bull put spread, a bullish options strategy that can take advantage of a rising market. A bull put spread involves buying one put option and simultaneously selling another put option with a lower strike price. With this strategy, you are betting that the underlying asset's price will increase, causing the value of the put options to rise as well.