A bull put spread is an options strategy where you sell a put option at a higher price and buy one at a lower price for the same asset and expiration date. This helps generate income and limits losses, making it good for traders expecting small price increases or stable prices. The most you can earn is the premium received, and the most you can lose is the difference between the strike prices, minus the premium. Working with a financial advisor can help you adjust this strategy to meet different investment goals and risk levels.

What Is a Bull Put Spread?

A bull put spread is a type of options strategy that traders use when they expect an asset’s price to remain stable or rise modestly. It involves selling a put option with a higher strike price while buying another put option with a lower strike price. 

As noted earlier, both options are on the same asset and have the same expiration date. The premium received from selling the higher strike put helps offset the cost of purchasing the lower strike put, which in turn reduces the overall capital requirement.

Put options allow the holder to sell an asset at a set price before the option expires. But, they are not required to do so. Traders who buy put options usually expect the asset’s price to fall, indicating a bearish outlook. Selling a put option, on the other hand, indicates that the trader is ready to buy the asset at the strike price if necessary.

In a bull put spread, the trader profits when the asset’s price remains above the higher strike price at expiration, allowing both options to expire worthless and capturing the net premium received. If the price falls below the lower strike, the loss is limited to the difference between strike prices minus the initial premium collected, making it a defined-risk strategy.

How to Use a Bull Put Spread

The strategy is most effective when implied volatility is high because this raises put option premiums, letting traders earn more from selling the higher strike put. Choosing the right strike prices is important for using the bull put spread effectively.

An in-the-money (ITM) put option has a strike price higher than the current market price of the asset, meaning it already has intrinsic value. An at-the-money (ATM) put option has a strike price equal to or very close to the asset’s current price. 

Selling an ITM put brings in a higher premium but has a higher risk of having to buy the asset if its price stays below the strike price. Selling an ATM put strikes a balance between earning a good premium and the option expiring without value. Many traders opt to sell an out-of-the-money (OTM) put, setting the strike price below the current price of the asset, which lowers the risk of having to buy the asset while still earning a premium.

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.

Example of a Bull Put Spread

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:

• Sell a $145 put for $4 per contract.
• Buy a $140 put for $2 per contract.

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.

Pros and Cons of the Bull Put Spread Strategy

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.

Bottom Line

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.

Tips for Investment Planning

• 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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