Bull Put Spread Strategy
What is a Bull Put Spread?
A bull put spread involves selling a put option at a higher strike price and buying a put option at a lower strike price. This strategy:
- Generates income through net premium received
- Has defined maximum risk and reward
- Profits when the stock stays above the higher strike price
- Limited risk to the difference between strike prices minus premium received
Example
On Lloyds Bank trading at £0.45/share, you create a bull put spread:
- Sell put at £0.45 strike for £0.03 premium
- Buy put at £0.40 strike for £0.01 premium
- Net premium received: £0.02/share
- Maximum risk: £0.03/share (£0.05 spread - £0.02 premium)
If Lloyds stays above £0.45, you keep the full premium. If it falls below £0.40, you lose the maximum amount.
Risks
- Maximum loss if stock falls below lower strike
- Early assignment possible on short put
- Limited profit potential
- Requires margin for the spread
Important: This strategy involves risk and may not be suitable for all investors. Always consider your financial situation and risk tolerance before trading.