## Definition of Bull Put Spread

What is the definition of a "bull put spread"? What is the definition of a "bull put spread"?

A "bull put spread" is a credit spread that is entered into in order to take advantage of a stock that is expected to advance in price.

In the "bull put spread", a trader will sell a put at a higher strike price and buy a put at a lower strike price. By buying the put, the trader locks in his maximum loss.

Let's take a look at an example:

Microsoft is currently trading at \$50 per share. You expect that the shares will increase moderately in price over the next month.

In order to take advantage of this theory, you decide to put on a bull put spread. By doing this, you will sell one in the money put and buy one out of the money put. Note: the put that you sell doesn't have to be in the money - you can choose to sell one out of the money put and buy one every further out of the money put.

Sell 1 July \$50 put @ \$3.00
Buy 1 July \$45 put @ \$1.50

So, immediately you book a credit of \$1.50 for the trade (\$3.00 - \$1.50).

Now, if MSFT closes over \$50 by the time that the options expire, you will get to keep the entire \$1.50 premium, as both options will expire worthless.

The maximum loss on the position will be the difference between the two strike prices (\$50 - \$45 = \$5 in this case), minus the premium that you received (\$1.50). So, even if MSFT went to \$1/share overnight, your maximum loss would be \$3.50 * 100 = \$350.

Now, if MSFT closes at \$49 on the day that the options expire, you will make a profit of \$1.50 - \$1.00 = \$0.50, as the July \$50 put that you sold will be worth \$1, and your \$45 put will expire worthless. Given that you received \$1.50 in premium to start the trade, you will need to pay \$1.00 to close out your put, leaving you with \$0.50.

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This is the "bull put spread".

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