A Bull Put Spread involves selling a put option at a higher strike price and buying a put option at a lower strike price. It profits from moderate price increases or stability.
- Ideal for moderately bullish conditions, where the price is expected to stay above the higher strike price.
- Selling a slightly OTM put and buying a farther OTM put caps both risk and reward.
- Risk is limited to the difference in strike prices minus the net premium received.
Example:
- NIFTY trading at 18,000.
- Sell 17,800 Put at ₹150 and buy 17,600 Put at ₹50 (lot size = 50).
- Outcome:
- If NIFTY stays above 17,800 at expiry:
- Both options expire worthless.
- Net profit = ₹5,000.
- If NIFTY falls to 17,700 at expiry:
- Loss on sold put = ₹100 × 50 = ₹5,000.
- Gain on bought put = ₹0.
- Net loss = ₹5,000 − ₹5,000 = ₹0.
- If NIFTY falls to 17,500 at expiry:
- Loss on sold put = ₹300 × 50 = ₹15,000.
- Gain on bought put = ₹100 × 50 = ₹5,000.
- Net loss = ₹15,000 − ₹5,000 − ₹5,000 = ₹5,000 (limited loss).
- If NIFTY stays above 17,800 at expiry: