Limit your risk with the bull put spread

Picking the right stock, picking the right direction, and picking the right time to buy or sell can sometimes be difficult. This is why you may want to consider a bull put spread.

A bull put spread offers limited risk, while giving you different ways to profit from volatility in the underlying asset. This strategy is particularly attractive for assets that are expected to rise slightly, may fall slightly, or may remain unchanged, and when volatility—the level of uncertainty in the market or a specific security—is high.

Establishing a bull put spread is relatively straightforward: sell one put option (short put) while simultaneously buying another put option (long put).

A bull put spread is also known as a vertical spread strategy (buying and selling options of the same underlying asset and expiration date) and a credit spread (you receive money at the outset of creating the position, and this is the maximum profit for the position). Because you are selling one put option and buying another, you are effectively hedging your position. The result is that potential gains and losses are capped.

When this strategy works

The bull put spread is used if you are moderately bullish on a stock or index, and your preference is to limit risk exposure. The primary goal is to make a short-term profit while limiting risk. You want the underlying asset (stock, index, etc.) to rise above both put options so they are out of the money (strike price is below the current market price), and the contracts expire worthless. If the options expire, you keep the credit you received.

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