Bull Put Spread: A Defined-Risk Bullish Credit

Key Takeaways

• A bull put spread sells a higher-strike put and buys a lower-strike put, taking in a net credit upfront.
• Maximum profit is the net credit; maximum loss is the strike width minus that credit.
• The most common mistake is selling a short strike so close to price that a small dip turns it into a loss.
• It profits from time decay and rising prices, so it suits a flat-to-bullish view with defined risk.

What It Is

A bull put spread, also called a credit put spread, is a vertical spread built from two puts on the same underlying with the same expiration. You sell a put at a higher strike and buy a put at a lower strike. The put you sell is worth more than the one you buy, so the trade opens for a net credit.

The short put generates income. The long put caps the downside risk that a naked short put would otherwise carry. The result is a limited-risk, limited-reward position that leans bullish.

The Intuition

If you think a stock will stay above a certain level, you can sell a put at that level and keep the premium when the stock holds. Selling a put alone exposes you to a large loss if the stock falls hard, because a short put obligates you to buy shares at the strike.

Buying a lower-strike put fixes that. It costs part of your credit but puts a floor under the loss. You accept a smaller income in exchange for a known worst case. This is the same credit-spread tradeoff as the bear call spread, mirrored to the bullish side.

How It Works

You collect a net credit when you open the position. The most you can keep is that credit, realized if both puts expire worthless because the stock finished above the higher strike.

The most you can lose is the distance between the strikes minus the credit, realized if the stock finishes below the lower strike. The formulas:

Max profit = net credit
Max loss   = (higher strike - lower strike) - net credit
Breakeven  = higher (short) strike - net credit

Time decay works in your favor because you are net short premium. Each day the stock holds above the short strike, the short put loses value faster than the long put.

Worked Example

A stock trades at 102. You sell the 100 put for 1.90 and buy the 95 put for, say, 0.70. Your net credit is 1.20 per share, or 120 dollars per spread of one contract each.

The strike width is 5.00. Your maximum loss is 5.00 minus 1.20, which is 3.80 per share, or 380 dollars. Your breakeven is the short strike minus the credit, 100 minus 1.20, which is 98.80.

If the stock finishes at or above 100, both puts expire worthless and you keep 120 dollars. If it finishes at or below 95, you lose 380 dollars. Between 95 and 100, the result slides between the two outcomes.

Common Mistakes

1. Selling strikes too close to price. A short put set just below the current price collects more credit but is breached by a minor pullback. Many traders place the short put where the chance of finishing in the money is low.

2. Forgetting early assignment. A short put that goes in the money can be assigned before expiration, forcing you to buy shares at the strike. Watch this near earnings or sharp drops.

3. Misjudging the risk-reward. A 1.20 credit against a 3.80 possible loss means you risk more than three dollars to make one. A high win rate can justify it, but confirm the probabilities.

4. Confusing it with selling a cash-secured put. A bull put spread caps your loss with the long put. A naked or cash-secured put does not, so the risk profiles differ sharply.

5. Holding through a breakdown. If the stock falls below the short strike, the trade moves against you quickly. Many traders set an exit rule rather than hope for a bounce.

Frequently Asked Questions

What is a bull put spread in simple terms? A bull put spread sells one put and buys another put at a lower strike, both expiring on the same date. You collect a credit and keep it if the stock stays above your higher strike.

How does a bull put spread affect investment decisions? It lets you profit from a flat or rising stock with a known maximum loss. Traders use it to generate income when they believe a stock will hold above a chosen level.

What is a real-world example of a bull put spread? On a stock at 102, selling the 100 put for 1.90 and buying the 95 put for 0.70 nets a 1.20 credit, with a 3.80 max loss and a breakeven at 98.80.

How can investors use a bull put spread effectively? Set the short strike at a support level the stock is unlikely to break, size the position so the strike-width loss is acceptable, and define an exit before the stock breaches the short strike.

How is a bull put spread different from a bear call spread? Both are credit spreads, but a bull put spread uses puts and leans bullish, while a bear call spread uses calls and leans bearish. Combine the two and you have an iron condor.

Sources

1. The Options Industry Council (OCC). "Bull Put Spread (Credit Put Spread)." https://www.optionseducation.org/strategies/all-strategies/bull-put-spread-credit-put-spread
2. Fidelity Learning Center. "Bull Put Spread." https://www.fidelity.com/learning-center/investment-products/options/options-strategy-guide/bull-put-spread
3. Cboe Options Institute. "Mastering Options Strategies." https://pdf4pro.com/view/mastering-options-strategies-cboe-5b3b00.html
4. Macroption. "Bull Put Spread Payoff, Break-Even and Risk-Reward." https://www.macroption.com/bull-put-spread-payoff/

Disclaimer

This article is educational content only and is not financial advice. Nothing here is a recommendation to buy, sell, or hold any security. Consult a licensed advisor before making investment decisions.