how the bull put spread works
a bull put spread is also called a credit put spread because the trade generates a net credit to the account when it is opened the option purchased costs less than the option sold since a bull put spread involves writing a put option that has a higher strike price than that of the long call options the trade typically generates a credit at the start the investor pays a premium for buying the put option but also gets paid a premium for selling a put option at a higher strike price than that of the one he purchased the maximum profit using this strategy is equal to the difference between the amount received from the sold put and the amount paid for the purchased put the credit between the two in effect the maximum loss a trader can incur when using this strategy is equal to the difference between the strike prices minus the net credit received benefits and disadvantages of bull spreadsbull spreads are not suited for every market condition they work best in markets where the underlying asset is rising moderately and not making large price jumps as mentioned above the bull call limits its maximum loss to the net premium debit paid for the options the bull call also caps profits up to the strike price of the short option the bull put on the other hand limits profits to the difference between what the trader paid for the two puts one sold and one bought losses are capped at the difference between strike prices less the total credit received at the creation of the put spread by simultaneously selling and buying options of the same asset and expiration but with different strike prices the trader can reduce the cost of writing the option limits lossesreduces costs of option writingworks in moderately rising marketslimits gainsrisk of short call buyer exercising option bull call spread calculating bull spread profits and lossesboth strategies achieve maximum profit if the underlying asset closes at or above the higher strike price both strategies result in a maximum loss if the underlying asset closes at or below the lower strike price breakeven before commissions in a bull call spread occurs at lower strike price net premium paid breakeven before commissions in a bull put spread occurs at upper strike price net premium received example of a bull spreadlet s say a moderately optimistic trader wants to try doing a bull call spread on the standard poor s 500 index spx the chicago board options exchange cboe offers options on the index assume the s p 500 is at 4402 the trader purchases one two month spx 4400 call for a price of 33 75 and at the same time sells one two month spx 4405 call and receives 30 50 the total net debit for the spread is 33 50 30 75 2 75 x 100 contract multiplier 275 00 by purchasing the bull call spread the investor is saying that by the expiration he anticipates the spx index to have risen moderately to a level above the break even point 4400 strike price 2 75 the net debit paid or an spx level of 4402 75 the investor s maximum profit potential is limited 4405 higher strike 4400 lower strike 5 00 2 75 net debit paid 2 25 x 100 multiplier 225 total this profit would be seen no matter how high the spx index has risen by expiration the downside risk for the bull call spread purchase is limited entirely to the total 275 premium paid for the spread no matter how low the spx index declines before expiration if the call spread purchase becomes profitable the investor is free to sell the spread in the marketplace to realize this gain on the other hand if the investor s moderately bullish outlook proves incorrect and the spx index declines in price the call spread might be sold to realize a loss less than the maximum 