What is Bull Put Spread Option Strategy ?

 

What is Bull Put Spread Option Strategy ?

The bull call spread is a multi-leg option strategy is very popular in options trading. which requires both Selling and Buying of a put option of different strike price of the same expiry of the same stock or index, in Bull call Spread You buy a lower strike put and You sell a higher strike put.

It is a bullish strategy. It Risk and Rewards are Fixed. This strategy is executed when you have bullish view on the stock or index. And when you think that the price will not fall below a certail lecIn this article you will learn about risk and reward profiles. Money Mangaement, when to implement thestrategy, how to trail and book full profits, Money Management and Position Sizing.

How to trade Bull Call Spread Strategy:

1. Sell Put Option:

• The strategy begins with selling a higher strike call option, typically called as the “Short Put.” You receive a Premium by selling a Put
• This position makes trader’s view bullish on the stock and index.

2. Simultaneous Buy Put Option

• To reduce the risk of the Short Put, a higher lower strike Put option is Bought known as the “Long Put,”
• By buying a Put option, you pay a premium and which will reduce the risk of the Short Put

Risk And Reward Of Bull Put Spread Strategy:

1. Limited Risk:

• The maximum loss in a bull Put spread is limited. Premium receive for Short Put – (minus) premium received. For Long Put Loss usually happens if the stock or index price closes below the strike price of Short Put.

2. Limited Reward:

• The maximum profit you can get is fixed, at the difference between the strike prices of the Short and Long Puts, minus the net premium received.
• This profit occurs if the stock and index price closes above the strike price of the Short Put strike price at expiration.

Factors to consider for Bull Put Spread Position Sizing:

1. How much risk you can take:

• Define Loss before trading a bull Put spread stategy.
  • Huge Position can put a hole in your capital, so stay light, risk as much you can afford to lose

• Asses Market Conditions:

Market conditions and volatility and technical Analysis are very Importatnt .

• Adjust you positon aligning with market. Like Trailing Stop Loss and Trailing Profits

Money Management techniques used for Bull Put spread option strategy:

Key Money Management Principles:

1. Position Size Relative to Portfolio:

• Avoid being Greedy : Stay Light, Don’t over leverage your Position, Even if the technical analysis shows breakout or breakdown or strong momentum. As market is unpredictable, No One can forecast the market
  • Spread risk : You do this by trading multiple hedged positions on different strikes

• Maximum Loss Limits:

• Set maximum loss limits for each bull put spread based on Technical analysis, if it fits in your risk management then only take position, ( How much loss you can take on one trade).
  • Don’t wait for position to hit you stop loss. If you see some negative news has hit the market or trend is changing or derivative data is suggesting trend change, then close the position immediately;

When to apply bull Put spread:

1. When you are Bullish on Stock or Index ( You expect price to go up):

• Execute a bull put spread when you when you expect index or stock to go up. Or you expect that the price will not fall below a certain level at the time of expiry
  • Conduct thorough technical and derivative data analysis to support your bullish view.

How to Trailing Profits and Book Full Profits in Bull call Spread Strategy

1. Trailing Profits:

• Consider trailing profits by moving the bought put option up. This will reduce the risk also, you will be able to trail profits. Or sell a lower strike bull call spread, and risk only the amount you have achieved in profits
  • .

• Booking Full Profits:

• Consider booking full profits when the underlying stock or index has reached the targets as per technical analysis. Or your profit objective is met
  • Always book your profits or lock your profits by reducing the risk

Stop Loss:

1. Setting Stop-Loss:

• Strick stop-loss is very important, Always Place your stop loss orders  as per technical analysis in brokers terminal and not in your mind,
  • Always put a stop-loss to limit potential losses in case the market moves against your bullish view.

• Follow Discipline

• Don’t be fearful or greedy to take position when charts tells you, Don’t take random trades, trade only when risk and rewards are favorable as per charts or technical analysis and accept stop loss if the trade goes wrong, and Ensure you trail profits and book full profits when your targets are met.

Key Takeaways

The bull put spread strategy is a Excellent strategy in which do not have risk of going naked and accepting huge losses. The beauty of the strategy is that you do not have to predict where the market will go, you just have to predict where the market will not go.  if the trade goes wrong. It reduces your loss to the extent discussed above. In this strategy, you don’t sell naked call option as its too risky, The stop levels are also very deep as the bought put will not let the stop loss hit. It will cover you to some extent. All the professional traders use this strategy. That is why they are consistently profitable. Their whole capital is not at risk, only some portion of it is in risk, which they can manage if the trade goes wrong. If you want to be a professional or a full time trader, mastering this bull put spread trading strategy is important