Credit Spread

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The bull put spread is one of the option spread strategies that option traders utilize either as a stand alone method to capture profits from a bullish stock, index, or ETF – or – it is a ‘component’ of one to several other option spread strategies – for instance the iron condor option, the butterfly spread, etc.

A bull put spread is composed of the sale of a put option and the purchase of a put option. In most cases, non directional trading participants who use this method will select the strike at which they sell their put option either near the money – or out of the money – below from where the market presently resides.

The trader will then acquire or purchase a put option below the level at which they sold – even further out of the money. The purpose of this purchased option is to ‘cover’ – or protect – the option which they sold – from significant losses if the vehicle being traded where to crash through the short put.

When this trade is initiated – it will immediately give off a credit into the traders account – and this credit is the difference between the option sold and the option that was purchased.

As the trade progresses and time begins to chip away at the the options (remember that options decay over time) as long as the stock being traded remains above the strike price level sold – the difference in prices between the sold option and the purchased option becomes narrower and narrower – finally reaching a point where the trader can purchase the bull put spread back for less than what it was sold for – or simply allow it to completely expire worthless on expiration day.

photo credit: temporalata