Bull Put Spread Simplified – Credit Spread Trade

Bull Put Spread (BPS) is an options tactic to make money with put when the market is trending up. Like the Bear Call Spread, you can see, the name Bull Put Spread has 2 parts to it.

  1. Bull = Bullish, or up-market.
  2. Put Spread = an options combination of buying a Put and selling a Put on the same month.

BPS could be simplified as a safe and protected way to make money selling put options. Normally, when a trader wants to make money on the way up, he can sell puts. If the market goes up and the options finally expired worthless, it keeps the premium from puts selling.

However, this is a very dangerous strategy because if the market crashes down unexpectedly, he will lose a substantial amount of money.

So Bull Put Spread came in to play as it adds the second, long leg one or a few strikes below the sold put options. The closer the strikes, the smaller amount of margin you will have to put up with your broker.

When you sell this spread, credit will come in your account but the risk of losing is still on the table as the market could go down. That's why you will be margined some money equivalent to the max risk.

Commission-wise , this is a spread that has 2 legs so every time you open or close you have to pay for 2 legs.

When you trade double credit spreads, like the Iron Condor, you will have to pay for 4 legs. However, discount could have applied pending which broker you are dealing with.

Happy Trading,

Source by Richard Minh Le

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