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What is a bull put spread?

What is a bull put spread?

A bull put spread is used when an investor thinks the price of a security is set to rise modestly.

The strategy involves buying one put option on the security while simultaneously selling another put option at a higher strike price. A Bull Put Spread is usually a vertical spread, meaning the two options used have the same expiration date (and different prices).

The lower-strike put option is bought and held long, while the higher-strike option is sold short. The short position sold will be at or just below the current market price for the security, and the long position will be at a lower strike price than the short position.

You can collect a higher premium for the hedging protection that the higher-strike put gives someone than you will have to pay for the lower-strike position. The premium collected for the shorted option should be enough to give the investor a net credit, after including commissions owed for the trades, meaning money is made just by putting on the position.

The credit netted will be the maximum profit that the investor can make with this position. The money may not remain in the investor’s pocket if the price goes down, however, because at that point the higher-strike short option will be exercised, and it will have to be covered by exercising the lower-strike put contract which the investor was holding.

The long position’s purpose, as with the bull call spread, is to cover the short position and to keep the investor’s risk within a finite range.

Keywords: portfolio management, long position, strike price, short position, calls, puts, options, maximum profit, vertical spread, potential loss,
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