Options Trading Strategies: Bull Put Spread
A bull put spread (credit put spread or short put spread) is a two legged strategy that consists of one long (bought) Out of The Money put and a short (sold) In The Money put, with the same expiration date.
When to use this strategy?
You are moderately bullish to neutral and expect that the price of the BTC/ETH will slightly rise in the near term. Also, a bull put spread is a less risky alternative to the short put, as the maximum loss is capped.
Below is a Profit and Loss chart example of a bull put spread options strategy:
Pros:
Limited maximum loss in comparison to naked put. This is a short term income strategy so you may profit without any movement of the BTC/ETH price.
Cons:
In most cases your maximum loss is will be greater than the maximum profit, in spite of the limited drawback.Limited maximum profit if the BTC/ETH price rises above the higher strike.
Example:
In this example, BTC is trading at 37,910.51 USD, and you expect its price to moderately rise. You have bought an OTM put with a strike price of 37,000.00 USD, and sold an ITM put with with a strike price of 39,000.00 USD, both with an expiration date of
February 5th 2022. As this is a credit spread, and a long put costs you less than a premium from a short put you have received a net premium of 981.05 USD, which is also your maximum loss.
The Profit and Loss chart is given below:
Upon expiration:
If the BTC price rises above the higher strike, both puts will expire worthless, and you will keep the net credit, which is your maximum profit.
If the BTC price falls, but remains above the break even, you will make a profit.
If the BTC price falls below the lower strike, then the short put is assigned and the long put is exercised. This means that BTC is purchased at the higher strike price and sold at the lower strike price. The result is your maximum loss which will be the difference in strike prices minus the net credit received.
| BTC at Expiry (USD) | Payoff (USD) |
|---|---|
| 37,000.00 (strike price LP) | -981.05 (max loss) |
| 37,093.00 | -888.05 |
| 37,500.00 | -481.05 |
| 37,902.00 | -79.05 |
| 37,981.05 (break even) | 0 |
| 38,138.00 | +156.95 |
| 38,503.00 | +521.95 |
| 38,936.00 | +954.95 |
| 39,000.00 (strike price SP) | +1,018.95 (max gain) |