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A bull put credit spread is an options strategy used when you have a moderately bullish outlook on the underlying asset and expect a limited price increase. It involves selling a put option at a higher strike price (short put) and buying another put option at a lower strike price (long put) on the same asset, both with the same expiration date.
Selling the short put: You collect a premium by selling the right, but not the obligation, to sell the asset at the higher strike price (if the buyer exercises the option).
Buying the long put: This provides protection in case the price falls below the lower strike price. You have the right, but not the obligation, to buy the asset at the lower strike price.
Profit: If the asset price stays above the lower strike price by expiration, the short put expires worthless, and you keep the premium collected. This is your maximum profit.
Loss: If the price falls below the lower strike price, you might need to buy the asset at the higher strike price if the short put is assigned (exercised by the buyer). This can lead to losses if the market price is even lower.
Limited profit potential: Profits are capped by the premium collected.
Limited risk: Maximum loss is the difference between the strike prices minus the premium received.
Generates income: You collect upfront premium from selling the short put.
This strategy is suitable for investors who:
The break-even point for an option strategy is the underlying asset price at the expiration date where the strategy neither makes a profit nor suffers a loss. It takes into account the combined costs and potential payoffs of all options involved in the strategy.
In options trading, the probability of profit (POP) reflects the likelihood of your chosen strategy resulting in a profitable outcome by the expiration date. While it's not a foolproof indicator, it can be a helpful tool for assessing potential risk and reward scenarios.
The risk-reward ratio is a crucial concept in options trading, helping you assess the potential profit compared to the potential loss of a particular strategy. It doesn't guarantee success, but it provides a valuable framework for informed decision-making.