A bull put spread is an options trading strategy utilised by investors expecting a moderate increase in the underlying asset’s price. It involves the simultaneous sale and purchase of put options with different strike prices but the same expiration date. The strategy aims to generate profits from a bullish or moderately bullish market scenario while limiting potential losses.
In a bull put spread, an investor sells a put option at a higher strike price and simultaneously purchases another put option at a lower strike price. By doing so, they collect a premium from the sold put option, which helps offset the cost of buying the put option with the lower strike price. The investor receives a net credit for establishing the position.
The goal of this strategy is to benefit from the belief that the asset’s price will rise or, at the very least, remain above the higher strike price by the expiration date. Should the asset’s price increase, both put options may expire worthless, allowing the investor to keep the premium received as profit. Even if the price doesn’t rise significantly, the maximum potential loss is limited to the difference in strike prices minus the net credit received when initiating the spread.