Bull Put Spread

Why Use a Bull Put Spread?

The Bull Put Spread is similar to the Bull Call Spread in its overall payoff structure.

Both are designed for a moderately bullish view.

The major difference is that the Bull Put Spread uses Put options, whereas the Bull Call Spread uses Call options.

So, if you believe the market is likely to move higher, you have two possible spread approaches:

• Bull Call Spread
• Bull Put Spread

This naturally leads to an important question:

If both strategies have a similar payoff structure, why choose one over the other?

The answer mainly comes down to option premiums, volatility, and the position of the market within the expiry cycle.

When Does a Bull Put Spread Make Sense?

The source highlights a particular situation where the Bull Put Spread can be attractive.

Imagine that:

• The market has declined considerably.
• Put option premiums have therefore become relatively high.
• Volatility is on the higher side.
• You expect the market to hold up and not fall much further.
• You have a moderately bullish outlook.

In such a situation, it can make sense to use a Bull Put Spread to receive a net credit, rather than paying a net debit for a Bull Call Spread.

The basic thinking is:

The market has already fallen, put premiums are attractive, and you expect the market to stabilise or move higher.

How Is a Bull Put Spread Created?

The traditional Bull Put Spread uses two Put options:

Leg 1: Buy an OTM Put

You purchase an OTM Put option.

This requires you to pay a premium.

Leg 2: Sell an ITM Put

You sell an ITM Put option.

This allows you to receive a premium.

Therefore, the premium received from the ITM Put is generally greater than the premium paid for the OTM Put.

The difference becomes your net credit.

The basic structure is:

Both options should:

• Belong to the same underlying
• Have the same expiry
• Have the same quantity

Why Is It Called a Credit Spread?

Consider a simple cash flow.

You buy an OTM Put and pay a premium.

At the same time, you sell an ITM Put and receive a premium.

If the premium received is greater than the premium paid, money flows into your account when the strategy is initiated.

That is a net credit.

Formula

Net Credit = Premium Received − Premium Paid

Because the Bull Put Spread generally results in a net credit, it is also called a Credit Spread.

This is the major difference from the Bull Call Spread:

A Practical Example

Let us take the example from the source.

Market Setup

• Date: 7 December 2015
• Nifty Spot: 7,805
• Market Outlook: Moderately bullish

The strategy is constructed as follows:

Step 1: Buy 7,700 PE

The 7,700 Put is OTM.

Premium paid = ₹72

Since money leaves the account, this is a debit transaction.

Step 2: Sell 7,900 PE

The 7,900 Put is ITM.

Premium received = ₹163

Since money comes into the account, this is a credit transaction.

Step 3: Calculate Net Credit

Net Credit = ₹163 − ₹72

Net Credit = ₹91

Therefore, ₹91 is received as the initial net credit from the strategy.

What Happens at Expiry?

Once the strategy is established, Nifty can expire at any level.

To understand the payoff, let us examine different expiry scenarios.

Scenario 1: Nifty Expires at 7,600

This is below the lower strike of 7,700.

7,700 PE

The intrinsic value of a Put at expiry is:

Max [Strike − Spot, 0]

Therefore:

Max [7,700 − 7,600, 0] = ₹100

You bought this Put for ₹72.

So the payoff from the long Put is:

₹100 − ₹72 = ₹28

7,900 PE

The intrinsic value is:

₹7,900 − ₹7,600 = ₹300

But you sold this Put for ₹163.

Therefore, the payoff is:

₹163 − ₹300 = −₹137

Overall Strategy Payoff

₹28 − ₹137 = −₹109

So the strategy loses ₹109.

Scenario 2: Nifty Expires at 7,700

This is exactly at the lower strike.

7,700 PE

It has zero intrinsic value.

Therefore, the entire ₹72 premium paid is lost.

7,900 PE

Its intrinsic value is:

₹7,900 − ₹7,700 = ₹200

You received ₹163 for selling it.

Therefore:

₹163 − ₹200 = −₹37

Overall Payoff

₹163 − ₹200 − ₹72 = −₹109

So once again, the strategy loses ₹109.

Scenario 3: Nifty Expires at 7,900

Now the market is at the higher strike.

Both Put options expire worthless.

Therefore:

• The ₹72 paid for the 7,700 PE is lost.
• The ₹163 received for the 7,900 PE is retained.

So:

Net Payoff = ₹163 − ₹72 = ₹91

The strategy makes a ₹91 profit.

Scenario 4: Nifty Expires at 8,000

This is above the higher strike.

Again, both Put options expire worthless.

Therefore:

Net Payoff = ₹163 − ₹72 = ₹91

The strategy again makes ₹91.

The Four Scenarios Together

This table reveals the basic behaviour of the Bull Put Spread.

If the market rises

The strategy becomes profitable.

If the market falls significantly

The loss is limited.

If the market rises sufficiently above the higher strike

The profit reaches its maximum and remains capped.

Maximum Profit

The maximum profit from the Bull Put Spread is equal to the net credit received.

Formula

Maximum Profit = Net Credit

In our example:

Maximum Profit = ₹91

This maximum profit occurs when the market expires at or above the higher strike.

Maximum Loss

The maximum loss is limited.

First calculate the spread.

Spread

Spread = Higher Strike − Lower Strike

In our example:

₹7,900 − ₹7,700 = ₹200

Now subtract the net credit:

Maximum Loss = Spread − Net Credit

Therefore:

₹200 − ₹91 = ₹109

So the maximum loss is ₹109.

This is an important feature of the strategy.

Even if the market falls sharply below the lower strike, the loss does not continue increasing indefinitely.

Breakeven Point

The breakeven point is the level where the strategy makes neither a profit nor a loss.

For a Bull Put Spread:

Breakeven = Higher Strike − Net Credit

In our example:

₹7,900 − ₹91 = ₹7,809

Therefore, the strategy starts making a profit when Nifty expires above ₹7,809.

The source's payoff discussion illustrates this same relationship between the higher strike, net credit, and breakeven.

The Three Critical Levels

For a Bull Put Spread, remember these three formulas:

Maximum Profit

Net Credit

Maximum Loss

Spread − Net Credit

Breakeven

Higher Strike − Net Credit

These three numbers allow you to quickly understand the basic risk-reward structure before entering the strategy.

Can We Use Other Strike Combinations?

Yes.

The traditional Bull Put Spread uses:

Buy OTM Put + Sell ITM Put

But the specific OTM and ITM strikes you select can vary.

The spread is simply the difference between the two strike prices.

The source gives several combinations to demonstrate how changing the strikes changes the risk-reward profile.

Consider the following examples:

The important observation is that changing the strikes changes the risk-reward ratio.

Larger Spread, Larger Potential Reward

Suppose you have a high level of conviction that your moderately bullish view is correct.

You may choose a larger spread.

A larger spread means the distance between the two strikes is greater.

This increases the potential maximum profit.

However, there is an important trade-off.

A larger spread also changes the breakeven and increases the maximum possible loss.

So you should not simply choose the widest possible spread.

The source summarises the relationship as:

Higher spread → Higher profit potential → Higher breakeven point

If your conviction is lower, a smaller spread may be more appropriate.

When Is the Bull Put Spread Particularly Attractive?

The strategy is especially relevant when the following conditions come together:

Market has fallen + Put premiums are high + Volatility is elevated + You expect the market to hold up

This combination can make the credit received from selling the ITM Put attractive enough to justify the strategy.

However, the strategy still has defined downside risk, so the trader must understand the maximum loss before entering.

Bull Put Spread vs Bull Call Spread

Both strategies express a moderately bullish view, but their construction is different.

The Bull Put Spread becomes particularly interesting after a market decline when Put premiums have expanded and volatility is elevated.

Key Takeaways

1. The Bull Put Spread is an alternative to the Bull Call Spread for a moderately bullish outlook.
2. It uses Put options rather than Calls.
3. The traditional structure is Buy OTM Put + Sell ITM Put.
4. Both legs should generally have the same underlying, expiry and quantity.
5. The strategy normally generates a net credit.
6. Net Credit = Premium Received − Premium Paid.
7. Maximum Profit = Net Credit.
8. Maximum Loss = Spread − Net Credit.
9. Breakeven = Higher Strike − Net Credit.
10. The strategy can be particularly attractive after a market decline, when Put premiums and volatility are elevated.
11. Different OTM and ITM strike combinations can be used.
12. A larger spread increases profit potential, but also changes the breakeven and maximum loss.
13. The strategy is most useful when you expect the market to hold up or move higher without a significant further decline.