Best time to trade a Bull Put Spread

Bull Put Spread

Most traders will buy a call spread when they expect that the markets go higher but to sell a bull put spread is a far better alternative.

The bull put spread option strategy is used when the stock just made a dip or is at an all time low.  This strategy is created by selling a put spread. Selling an put option out of the money and buying a lower further out of the money.

The trader hopes that the price of the underlying rises. The trader can close the position for a profit or  wait until expiration. In that case the options will expire worthless. And the trader can keep the premium received.

This type of strategy (selling one option and buying another with a lower strike price) is known as a credit spread.

By selling a put spread instead of a naked option you reduce your cost basis and reduce the risk you take in the trade.

Credit Spreads have defined risk and limited profit potential. When you set up this strategy in the right way you have more 50% chance on profit.

Figure 3 shows the parity graph of a bull put spread at option expiration.

Parity Graph of a Bull Put Vertical Spread
Figure 3: Parity Graph of a Bull Put Vertical Spread (Credit)

The maximum possible profit using this strategy is equal to the option premium received. The maximum loss is equal to the difference between the strike prices minus the net credit received. Bull put spreads can be created with in-the-money or out-of-the-money put options, all with the same expiration date.

The passage of time helps the position since short strategies profit from time decay.

 

When to trade a bull put spread

This is my favourite strategy when stock price drops. The options are expensive because of high volatility. And a lot of times the stock price will move up a little. I like to sell options and receive option premium in order to buy them back 10 or 20 days later.

 

Video on bull put spread

Shows you how to set up a limited risk bull put spread strategy. The also show you how to enter this trade on the dough trading platform. Learn how to sell premium and place high probability trades.

 

 

Conclusion

We like to sell options when the price of the option dips because the options premium rise. When the underlying rises or the volatility drops after some time we will buy the options back.

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