Understanding The Bull Put Spread Strategy

In this issue, let’s explore the Bull Put Spread, building on Sarvani Shah’s growing knowledge of options strategies and focusing on how she can use this approach to profit in stable or slightly rising markets

The Bull Put Spread is a well-known options trading strategy used by traders with a moderately bullish outlook on the market. Like the Bull Call Spread, this strategy has a defined risk and reward structure, but instead of using call options, the trader utilises put options to create a spread. This strategy becomes particularly valuable when a trader expects the underlying asset to remain above a certain level by the expiry date so that the probability of winning compared to bull call spread is more.

Sarvani’s Strategy Evolution: Embracing the Bull Put Spread
After learning and applying the Bull Call Spread strategy in her recent trades, Sarvani Shah noticed the market’s behaviour and realised that while it appeared slightly bullish, she wasn’t expecting any sharp moves. Having profited from a well-timed Bull Call Spread, Sarvani wanted to try something that could allow her to generate income even if the market didn’t rally significantly.

This is when the Bull Put Spread entered her radar. With her new goal in mind, Sarvani decided to utilise the Bull Put Spread strategy, which would help her capitalise on moderate market conditions while controlling her risk exposure. She was confident that this strategy would allow her to profit from a steady market, aligning with her expectations for Nifty in the coming weeks.

Why Bull Put Spread?
The Bull Put Spread is a powerful options strategy for traders with a moderately bullish outlook. What makes it unique is its ability to generate potential profits even when the market shows limited movement or a slight dip. Instead of relying solely on significant upward price moves, as some other bullish strategies do, this spread strategy focuses on reducing risk while still offering a reasonable return in slightly rising or stable market conditions.

One of the key advantages of the Bull Put Spread is the defined risk and reward structure. By selling an ITM put option and buying an OTM put option, traders cap both their potential loss and profit, allowing for more controlled exposure. The premium collected from the short ITM put reduces the overall net cost of the position, which lowers the break-even point and minimises risk. This strategy is particularly useful when traders believe the market will not fall significantly but may see some slight upward movement.

The added benefit of limited downside exposure, along with the reduced need for drastic market shifts, makes it a popular choice among those who want a balance of risk and reward without the need for large price fluctuations. Consider the following example:
• Nifty Current Market Price: ₹26,000 
• ITM Strike 26,200 PE Price: ₹410
• OTM Strike 25,800 PE Price: ₹250
• Expiry Date: October 31, 2024

To execute the Bull Put Spread strategy, Sarvani would:
• Sell the 26,200 strike put option for ₹410
• Buy the 25,800 strike put option for ₹250 This results in a net credit of ₹160 (₹410 – ₹250), which is her maximum potential profit.

Breakeven Point
For Sarvani to break even, the market must remain above a specific level: Breakeven Point = ITM strike – net credit = 26,200 – 160 = 26,040 This means Nifty needs to stay above 26,040 by expiry for Sarvani to avoid any losses.

Payoff Structure
At different market levels, the payoff is as follows:
1. If Nifty ends above 26,200 Both options expire worthless, and Sarvani retains the entire net credit (₹160).
2. If Nifty ends between 25,800 and 26,200 The ITM put incurs a loss, while the OTM put offers protection. Net payoff = ₹160 – (26,200 – Nifty price).
3. If Nifty ends below 25,800 Both puts are exercised, and Sarvani incurs the maximum loss. Maximum loss = (26,200 – 25,800) – ₹160 = ₹240

Bull Put Spread versus Bull Call Spread
Both the Bull Put Spread and Bull Call Spread are bullish strategies, but they differ in approach and market outlook. While both seek to benefit from upward movement, the Bull Call Spread is more aggressive, requiring a noticeable price rise to reach profitability, whereas the Bull Put Spread allows for more flexibility and can remain profitable even in slightly rising orneutral markets. In a Bull Call Spread, the profit potential is driven by the difference between the strike prices as the market moves upward.

It requires the market to cross the breakeven point and continue rising for significant profits. On the other hand, the Bull Put Spread’s strength lies in its ability to capitalise on the market remaining stable or slightly bullish. Even if the market doesn’t rise dramatically, the strategy can be profitable as long as the price stays above the breakeven level. Another notable difference is the premium structure. The Bull Call Spread involves a net debit (paying out for both options), while the Bull Put Spread typically results in a net credit (earning a premium).

This means that with the Bull Put Spread, a trader collects premium upfront, while the Bull Call Spread requires the market to move upward more aggressively before profitability is realised. Ultimately, the choice between these strategies comes down to market expectations. If a trader expects a steady or modest rise, the Bull Put Spread offers a safer route with defined risk and reward. Conversely, if a trader anticipates stronger bullish momentum, the Bull Call Spread provides more upside potential, albeit with greater dependence on a larger market move.

Conclusion
The Bull Put Spread is an excellent strategy for traders with a moderately bullish outlook or those who expect the market to remain stable. By generating income upfront and limiting risk, this strategy provides a well-balanced approach to options trading. As Sarvani continues her journey, mastering this strategy has helped her diversify her toolkit and manage her trades more effectively. This is of essence given that the market may turn volatile at times or remain stable for long periods or there could be opportunities that may not immediately be visible but are there for the taking.

The comparison with the Bull Call Spread further underscores how different market conditions require different strategies, with each having its own place in a trader’s arsenal. As Sarvani refines her skills, she’s learning to recognise when the market offers opportunities for income generation and when it’s time to step back and take a more conservative approach. This thoughtful and strategic evolution is what sets her apart as she navigates the complex world of options trading, armed with knowledge and a growing sense of confidence.