Bull Put Spread Explained: A Credit Spread Strategy
A bull put spread is a two leg credit strategy where you sell a put at a higher strike and buy a put at a lower strike, both on the same underlying and the same expiry. You receive a net credit at entry, and you keep it if the underlying stays above the higher strike until expiry.
It is a mildly bullish position with capped profit and capped loss. Traders use it when they expect an index or stock to hold a level rather than to rally hard, because time decay works in favour of the position.
How the Structure Is Built
Both legs are puts, and the sold put is always closer to the money. That is what makes the trade a credit rather than a debit.
- Sell one out of the money put, which brings in the larger premium
- Buy one further out of the money put in the same expiry, which costs less
- The difference is your net credit, received on day one
- The long put defines the worst case, so the loss cannot run away
Four numbers are fixed the moment you enter. Max profit equals the net credit. Max loss equals the strike difference minus the net credit. Breakeven equals the higher strike minus the net credit.
A Worked Nifty Example
Assume Nifty is at 24,000 with about 25 days to monthly expiry. The premiums below are illustrative, and the Nifty contract size used here is 75 units, which the exchange revises from time to time.
- Sell the 23,800 put at Rs 150
- Buy the 23,600 put at Rs 90
- Net credit: Rs 60 per unit, so Rs 4,500 for one lot
Strike difference is 200 points. Max loss per unit is 200 minus 60, so 140, or Rs 10,500 for a lot. Breakeven sits at 23,800 minus 60, which is 23,740. Nifty can drift down 260 points and the position still breaks even.
Payoff Table at Expiry
| Nifty at expiry | Short 23,800 put | Long 23,600 put | Net per unit | Per lot of 75 |
|---|---|---|---|---|
| 23,500 | -300 | +100 | -140 | -Rs 10,500 |
| 23,600 | -200 | 0 | -140 | -Rs 10,500 |
| 23,700 | -100 | 0 | -40 | -Rs 3,000 |
| 23,740 | -60 | 0 | 0 | Rs 0 |
| 23,800 | 0 | 0 | +60 | +Rs 4,500 |
| 24,200 | 0 | 0 | +60 | +Rs 4,500 |
Note the shape. Profit is flat above 23,800 however far Nifty rallies, and loss is flat below 23,600 however far it crashes. Risk to reward is roughly 1 to 0.43, typical for a credit spread and the reason win rate alone tells you nothing.
Margin Benefit for a Hedged Position
Selling a naked Nifty put demands SPAN plus exposure margin that can run into lakhs for one lot. Add the protective long put and the clearing corporation recognises the hedge, cutting the requirement to a fraction of the naked figure.
Two practical points. Margin is computed by the exchange risk system and moves with volatility, so use your broker margin calculator before placing the order. Also enter both legs together, since squaring off the long put first turns the trade back into a naked short with a much larger margin call.
When It Works and When It Fails
Conditions That Suit It
A sideways to gently rising market with elevated implied volatility is the friendliest setup, because you are a net seller of premium. Theta decay adds a little value each day the underlying stays put.
Where It Goes Wrong
A sharp gap below the long strike hands you the full loss immediately, and there is nothing left to manage once both strikes are breached. A volatility spike widens both premiums and can show a paper loss well before expiry even if the level holds. On single stock options, an in the money short put at expiry means physical settlement, so you take delivery of shares and need the full cash.
One misconception deserves correction. A high probability of profit is not a low risk trade. Losing 140 points on the rare failure wipes out two winning cycles of 60 points each, so sizing carries this strategy, not the hit rate.
Frequently Asked Questions
Is a bull put spread the same as a bear put spread?
No. A bull put spread is a net credit and profits when the underlying rises or stays flat. A bear put spread is a net debit built by buying the higher strike put, and it profits when the underlying falls.
Should I hold a credit spread to expiry?
That is a personal risk decision, not a rule. Many traders close early once most of the credit has decayed, because holding the last few rupees exposes them to gamma risk near expiry for very little remaining reward.
How far apart should the strikes be?
Wider strikes bring a larger credit and a larger maximum loss, narrower strikes do the reverse. The choice sets your risk per lot, so decide the rupee loss you accept first and let that pick the width.
What if Nifty settles between the two strikes on expiry day?
The short put settles in cash against the closing index value and the long put expires worthless, leaving a partial loss between zero and the maximum. Index options in India are cash settled, so no delivery is involved.
Key Takeaways
- Sell a higher strike put, buy a lower strike put in the same expiry, for a net credit.
- Max profit equals the net credit, max loss equals strike width minus that credit.
- Breakeven is the short strike minus the net credit received.
- The long put cuts margin sharply compared with a naked short put.
- Loss per failure is larger than gain per success, so sizing matters more than win rate.
