Bull Put Spread ~ Put Options
Bull Put Spread
Put Spreads can be used when an investor is willing to accumulate stock, but have downside protection in case the underlying stock breaks below a pre-determined level. The strategy is called the bull put spread.
What you do is sell out of the money put options, but purchase further out of the money put options for downside protection in case the stock breaks down. For example if XYZ is trading at $25, the investor sells 1 $20 put option and buys one $15 put option for a net credit of $1. If the stock stays above $20, the investor will keep the credit. If it goes below $20, the stock will be put to the investor, but the investor has downside protection at $15 so the maximum potential loss is capped at $4.