Bull put spread

Discussion in 'Options' started by k_rasuri, May 31, 2013.

  1. k_rasuri


    Hi i want to play this 'Bull Put Spread' option. I have read and understood the risks. There is limited risk and limited reward (which is the premium received). But i want to know what are the money requirements. Selling puts will put me in a obligatory position to own the stock. Do i need to have enough money in my account to be prepared for this. I can compensate it will long put, but is there any intermediate period where i need to have enough money in my account. thanks
  2. You will need to check with your broker to determine their margin requirements and assignment policies.
  3. your margin will be the distance between the strikes x 100. so for a 40/45 credit spread, your margin will be 500 bucks.
  4. benjjj6


    Could someone explain how the maximum loss could just be the difference between the strikes (x 100). Does this not include the cost you incur if your Puts are assigned?

    Surely if you are assigned and need to buy the stock you loss will be greater than the difference between the 2 strikes?

    In other words, how does the purchased PUT defend you against a greater loss? Could someone show me the maths?
  5. I am not an expert but I will certainly try to explain.

    Let's look at selling the 136/135 July bull put spread on GLD. Right now you could do that and get a credit of $.40. This would, I believe, be considered a neutral to bullish position on GLD.

    The credit you received for selling the spread would be your max profit. I think you understand that.

    If you sold that spread you would be short the 136 strike and thus OBLIGATED to buy the stock for $136 any time before expiration. Conversely, you would be long the $135 strike and thus HAVE THE RIGHT to sell the stock at $135 any time before expiration.

    Take a minute to consider the difference between an obligation and a right. Now that you have that down, let's move on.

    You enter this trade and, perhaps foolishly, hold it until close to the July expiration. I say "foolishly" because GLD dropped to $130.

    So, GLD is trading at $130 and you are assigned shares based on your $136 short strike for a loss of $6 per share. BUT you also have the RIGHT to now sell those shares for $135 limiting your loss to $1. per share. Now consider the $.40 credit you received when you entered the spread trade. This credit reduces your loss to $.60 per share (less commissions).

    Is that explanation helpful?