Bull Put Spreads (Credit Spreads)

For investors who are generally bullish about a stock an are looking for a low risk, limited reward strategy.

Example	Increase in Volatility	Time Erosion
buy put (lower strike)   sell put (higher strike)	helps position as long as stock price increases	helps position

Earning Income on Your Portfolio

When your feeling on a stock is generally positive, bull put spreads are great low risk, limited reward strategies. To create a bull put spread by using put options at or near the current market price of the stock.

For example, if you have a bullish short-term feeling about XYZ when it is trading at $46, you enter a bull put spread by selling the 45 put @ 7 and buying the 40 put for 3. In this case, the maximum profit would be the $400 you received when you initiated the position.

Stock: $46
Buy one 40 put @ 3	($300)
Sell 1 45 put @ 7	$700

The maximum loss would be the difference between strike prices less the $400 credit you received for putting on the trade. In this example, the maximum loss would be $100 ((45 - 40) x 100) - $400.

Stock: $46
Buy one 40 put @ 3	($300)
Sell 1 45 put @ 7	$700
Total Credit	$400
Maximum Profit	$400
Maximum Loss	$100

Stock Price at Expiration	Profit (Loss)	Return on Investment*
$35	($100)	(80%)
$40	($100)	(80%)
$41	$0	0%
$42	$100	20%
$43	$200	40%
$44	$300	60%
$45	$400	80%
$46	$400	80%
$50	$400	80%

*This example does not factor in commissions, interest or tax consequences. **The Return on Investment is calculated based on the maximum loss of the position before including the initial credit received. The maximum loss in this case is $500.