AI Summary
Show More
Quickly grasp the article's content and gauge market sentiment in just 30 seconds!
The bull put spread is a two-legged options strategy used by traders when they believe that the market is moderately bullish. This strategy is identical to the bull call spread in payoff structure, but is slightly different from it in terms of execution. Instead of call options, put options are used in this strategy — hence the name bull "put" spread. Let's get into the details.
The bull put spread is one of four vertical spread options strategies available. It is an advanced options trading strategy that uses a low amount of capital to profit from a wide range of trading environments.
The bull put spread looks to profit from two options. The first option is bought at a lower strike price and expiration date, while the second is written with a higher strike price, but the same expiration date.
Source: Investopedia
The bull put spread is an options strategy employed by investors who anticipate a slight increase in the underlying asset price. It is a bullish strategy that seeks to profit off a volatile market that’s primed to go up.
This strategy involves using two options to create a profit range. In its setup, the options trader buys an out-of-the-money (OTM) put option and sells an in-the-money (ITM) put option. This will create an options range with one high strike price and one low strike price. The difference between the premiums of these two options results in a net credit for the investor.
Premium of OTM Put Option − Premium of ITM Put Option = Net Credit
For example, if a trader thinks that the price of Bitcoin, trading hypothetically at $20,000, will increase moderately in the near future, they will buy an OTM put option at $23,000 and sell an ITM put option at $18,000. Profit will be made if, at expiration, Bitcoin closes at the $23,000 level or higher. However, the trader will incur a loss if BTC’s price falls below the current market price.
A bull put spread involves writing one put option while concurrently buying another put option, but with a lower strike price and the exact same expiration date.
On the other hand, a bull call spread involves buying one call option and simultaneously selling another call option (for the same underlying asset) with the exact same expiration date, but a higher strike price.
The bull put spread is a highly technical strategy. While not impossible for intermediary-level traders, advanced/expert options traders will likely find the bull put spread easier to execute.
The range of ideal market conditions for a bull put spread is very limited, and most ideal when the market is slightly bullish.
In a full-blown bull market, the bull call spread will help the trader earn more returns than with the bull put spread. In a bearish market, the bull put strategy will result in losses.
The breakeven point of a bull put spread is simply the short put strike minus the premium received.
Breakeven Point = Short Put − Premium Received
For example, if you sell a bull put spread with a $23,000 short put and collect a $3,220 premium, the position’s breakeven price will be $23,000 - $3,220 = $19,780.
The bull put spread sweet spot is when the stock is at or above the strike B price at expiration. In this case, both options will expire worthlessly. Therefore, the bull put spread option strategy reaps maximum profit that’s equal to the credit taken when you’re entering the position.
If the price of the underlying asset has decreased and the position is under threat, bull put spreads might be modified. To increase the likelihood of success as the trade nears expiration, an investor has two options strategies:
In this strategy, the profit potential is capped. The main opportunity for profit is when the price of the cryptocurrency asset is above the strike price at the expiration date. This way, the trader profits on the premium earned.
Just as the profit is capped, losses using the bull put strategy are also capped. When using this strategy, the worst that can happen is for the price of the crypto to be lower than the strike price (price of crypto < strike price). This will cause the trader to buy the crypto at a loss. Maximum loss can be calculated by subtracting the premium paid from the cost of the strikes.
Maximum Loss = Cost of Strikes − Premium Paid
Let’s apply this strategy to trade Bitcoin options on the Bybit exchange, from a first-person POV.
As an options trader, I believe that the price of Bitcoin (which is currently at $20,000) is going to surge in the next couple of weeks.
Source: Bybit | BTC/USDT
Visit the Bybit exchange → Derivatives → USDC Options.
Source: BybitLet’s apply the bull put spread strategy to BTC options.
As discussed above, the first step is to buy a put option. I’m buying a BTC-15JUL22-17000-P option with a premium of $200.
Source: Bybit
Simultaneously, I’m selling the BTC-15 JUL22-22000-P put option for $2,160. The net credit I receive is $1,960 when entering the spread position.
Source: Bybit
The margin requirement is simply the per unit difference between the strike prices of both put options.
It seems reasonable to believe that time decay would be advantageous, regardless of its theoretical effect on the two contracts. Theta is the rate by which the time decay on an option is measured.
The argument around the Theta decay impact is that, provided every other factor remains constant, most options will lose value and become unattractive to the trader as they near maturity. Theta is always represented as a negative number, and is subtracted to form the value of the options.
Example: If Theta is −2 on a given Tuesday, the value of the asset's options is reduced by 2 on that day.
The effects of volatility fluctuations on the two contracts may significantly negate each other because the strategy calls for shorting one put and buying another with the same expiration.
The market's estimate of the crypto price's direction and the underlying option’s supply and demand directly impact implied volatility. An increase in the demand for the option will lead to an increase in implied volatility.
As mentioned previously, this strategy performs best in markets that are moving sideways to slightly higher. In a market upturn, the trader would be better served by employing a bull call spread or buy calls; and in a market downturn, the bull put spread would typically be ineffective.
The covered call strategy, an alternative to the bull put spread, involves owning an underlying cryptocurrency and selling OTM call options in a similar ratio. The call option won't be exercised if the price of the coin stays flat. Up to that point, you'll earn the premium stated in the contract. With a covered call, the probability of earning a profit is high, but there’s little flexibility and you may not be able to earn as much (as with other strategies).
The options market can be complicated and the topic is often overwhelming, especially to the uninitiated. Combined with technical analysis, however, crypto options are an excellent way to gain exposure to the market. The bull put spread strategy is one of several trading strategies you can profit from. Note, however, to always DYOR before entering any trade. Never forget that capital preservation is the first rule of investing: Only trade what you can reasonably stand to lose.