Spread Trading: An Introduction to Trading Options in Nine Simple Steps

CHAPTER 37

The Bull Put

“Okay,so we’ve looked at a trade for a bullish trend based on call options,” said Nate, “and it was a debit trade. Now we’re going to look at a bullish trade based on put options, using a credit strategy. And remember that we won’t own any stock; we’ll work only with the option instruments themselves.” (See Figure 37.1.)

“The trade we’re going to talk about is called the bull put,” said Aaron. “It’s called a bull put because it optimizes a bullish (though also a stagnant) trend, and it’s called a bull put because it uses the put options to do so.

“In this trade,” he continued, “the short put option is our primary instrument because it’s the one we’re using to make money in the trade; we use it to take in a credit. So you can already see why this is a credit trade: the main way we make money is with the credit we take in for this short put.”

“Now recall what we learned about short puts,” said Nate. “They’re risky. If our strike price goes in the money—and remember, with puts that means the stock price goes lower than the strike price—we will be assigned, and we will have to buy shares at higher than the market price.”

The main way we make money is with the credit we take in for this short put.

“And we don’t want to do that normally,” interjected Aaron, “so we do three things to limit our risk. The first thing we do is place our short put strike out of the money. We want to finish out of the money, so we obviously want to start out of the money. The second ...