A Bull Put Spread Strategy can be profitable when the stock or index is either range-bound or rising. This strategy involves protecting the downside of a sold Put by purchasing another Put with a lower strike price, effectively acting as insurance for the sold Put.
The purchased Put with the lower strike price is further out-of-the-money (OTM) compared to the sold Put with a higher strike price, ensuring the investor receives a net credit. This occurs because the further OTM Put purchased is less expensive than the sold Put. This strategy is similar to the Bull Call Spread but aims to earn a net credit (premium) and generate income.
If the stock or index rises, both Puts expire worthless, allowing the investor to retain the premium. If the stock or index falls, the investor's breakeven point is the higher strike price minus the net credit received. As long as the stock remains above this breakeven level, the investor realises a profit. Otherwise, a loss may be incurred. The maximum potential loss equals the difference between the strike prices minus the net credit received. This strategy is best adopted when the stock or index trend is upward or range-bound. Consider the following example for a better understanding.
