How to Use a Bull Put Spread Strategy

As the expiration date approaches, traders might close the trade early to secure profits if the value of the spread has dropped significantly. If the price of the asset falls, extending the spread to a later date or changing the strike prices can help reduce potential losses.

To see how a bull put strategy plays out, let’s assume that a stock is currently trading at $150. A trader expects the stock to stay above $145 over the next month. To set up a bull put spread, the trader would:

This results in a net credit of $2 per share, equal to $200 per contract.

• If the stock remains above $145 at expiration, both options expire worthless, and the trader keeps the $200 profit.

• If the stock falls below $140, the trader takes the maximum loss, calculated as the $5 strike difference minus the $2 credit, totaling $3 per share or $300 per contract.

• If the stock closes between $140 and $145, the trader experiences a partial loss depending on the put spread’s value at expiration.

Overall, the bull put spread allows the trader to profit from neutral-to-bullish price action while maintaining a defined risk.

One key advantage of using a bull put spread is that it lets a trader profit even if the stock price does not rise significantly. It only has to stay above the short put’s strike price at expiration.

Additionally, because the trade results in a net credit, time decay works in the trader’s favor, meaning the value of the spread naturally declines over time, increasing the likelihood of a profitable exit. The defined risk structure also makes it easier to manage losses when compared with selling naked puts.

However, just as it limits potential losses, a bull put spread caps potential profits. These are limited to the value of the net premium received, which may be lower than other bullish strategies like buying calls.

Although the risk is capped, there’s a chance of early assignment if the short put falls into the money before expiration, particularly for stocks that pay dividends. If implied volatility falls, it can decrease the spread’s value, which is good for the seller. But, if volatility rises, the trade could move against the trader. Traders can potentially avoid losses by making adjustments, such as extending the expiration date, though this requires careful management.

A bull put spread allows traders to earn income with managed risk, which can be a suitable strategy for moderately bullish markets. This strategy uses two put options at different strike prices to cap losses while taking advantage of time decay and steady prices. While profit and risk are predefined, things like implied volatility and early assignment can affect results. Carefully choosing strike prices and expiration dates could help match the trade to market conditions.

• A financial advisor can help you manage risk for your portfolio. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

• If you want to know how much you could pay in taxes for the sale of an investment, SmartAsset’s capital gains calculator can help you get an estimate.

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