Bull Put Spread technique technique should be used if you feel market has limited downside or is slightly bullish. It should not be negative. Even if the market is negative your losses is limited. So it does provide a cap on maximum loss you can incur if market goes wrong from what you predicted (that is in case of market meltdown kind of situations) .
You can use it if you feel market will be conservatively bullish in near terms. This technique has limited profit with limited loss and is combination of two techniques we have already discussed on the website.It is combination of below techniques
- Shorting Put– It should be OTM (Out of money)
- Long Put– It should be OTM (further Out of money)
- Both of them should be of same Expiry
- Both the trades should be on same instrument
- The strike prices gap should be of same gap
For example if you have to create Bull Put spread for a stock which is trading at 1,000 levels then you should sell put option of strike price 900 and you should buy put option for strike price 800. So the buy strike price should be less than the sell strike price. So the gap between the buying and selling options trade should have same gap in between. This is very important point in creation of the spread. If not then spread may not be correctly created causing you issues in executing it.
You can watch either the English Video or Hindi Video to understand the strategy in details.If you are new to Options trading then I would suggest you to watch or read the Getting Started tutorial on Options . That will help you understand the strategies as well.The video explains below points in details
- When to use the strategy?
- Margin requirement for the strategy
- Profit and loss range and potential of it
- Explanation of the technique with Nifty example
English Video
Hindi Video
Conclusion
This strategy requires you to have directional understanding of the market. So you should use the technique only if the market is going to be in positive direction. If market moves below the strike price which you bought or at the strike price at which you bought then you will incur maximum loss. For maximum profit market should be at the strike price which you sold to above that strike price.
So it is very important that market remains above the put sold strike price that is it should be positive or range bound expiring at the price it is trading at.Even if your prediction goes wrong the loss potential is limited. So this one is well suited if you want to protect your trade setup from market meltdown or any unexpected turn of negative events.
Bull Call Spread can also be used as an alternative to this trade as both requires the market to be conservatively positive. You should read both the techniques and use the one which fits in your trade setup or stock or indices in question. Note the limited loss in case your view goes wrong does add up an edge for this technique. It is combination of buying and selling options. There are other techniques which you may try in case of bullish market sentiment as discussed in Options trading guide which is free for all.