Option trading involves trading of options instead of the stocks in an underlying exchange market. There are so many strategic ways to earn money in options trading; one way is through the bull put spread. This strategy is an independent trade employing a mixture of two different puts; however, this one is in a specific direction. In this spread, you have to buy a put contract for any strike price. Then you have to sell a put contract with a price higher than the original purchased. The profit comes from the difference between the sold option and the purchased put. The goal is for both put options to expire worthless.
To make a bull put spread, a trader would first have to sell a put contract. Then the trader would have to buy a single put contract for protection. As the trades progress, the trader is watching for the price to move upward.
Just like any strategies, there are risks as well as rewards to consider before doing this strategy. The risk of using a bull put spread strategy is low. The risk is limited and restricted only to the difference of the strike prices between the long and short puts, less the initial credit made when entering the trade. Mathematically speaking, a trader can calculate your bull put spread risk by the following formula:
Maximum Risk = (difference in the strike price between long and short put) minus (the Initial credit).
On the other hand, bull put spread reward is limited only to the premium credit made when you enter the trade.
Jeff Ziegler, author of this article is also interested in Credit spread options and recommends you to please check out some Credit spread strategies if you liked reading this information.
No comments:
Post a Comment