Tim Olson
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33 lines
1.4 KiB
Markdown
33 lines
1.4 KiB
Markdown
---
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description: "A bullish vertical spread selling a higher-strike OTM put at K2 and buying a lower-strike OTM put at K1 for a net credit, profiting if the stock stays above K2."
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tags: [options, income, bullish, vertical-spread]
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---
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# Bull Put Spread
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**Section**: 2.7 | **Asset Class**: Options | **Type**: Income
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## Overview
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The bull put spread is a vertical spread consisting of a long position in an OTM put option with strike K1, and a short position in another OTM put option with a higher strike K2 (K2 > K1). This is a net credit trade. The trader's outlook is bullish. This is an income strategy.
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## Construction
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- Buy 1 put option at strike K1 (lower OTM), same expiry
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- Sell 1 put option at strike K2 (higher OTM, K2 > K1)
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Net credit: C = premium received for K2 put - premium paid for K1 put
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## Payoff Profile
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f_T = (K1 - S_T)+ - (K2 - S_T)+ + C
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- Breakeven: S* = K2 - C
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- Max profit: P_max = C (if S_T >= K2 at expiry; both puts expire worthless)
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- Max loss: L_max = K2 - K1 - C (if S_T <= K1 at expiry)
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## Key Conditions / Signals
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- Bullish to neutral outlook; expects stock to remain above K2 by expiry
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- Prefer when implied volatility is elevated (larger credit received)
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- Income generation with defined downside risk
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## Notes
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The bull put spread is a credit spread. Maximum profit is limited to the net credit received. Maximum loss is the spread width minus the credit. The long put at K1 provides downside protection relative to a naked short put.
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