If the stock price remains constant and if implied volatility does not rise, then a loss will be incurred.
The result is that 100 shares are purchased and 200 shares are sold.
Credit put spread or bull put spread: A bullish position in which you obtain more premium on the short put.
Since the options differ in their time to expiration, the level where the strategy breaks even is a function of the underlying stock price, implied volatility and rates of time decay.
Long options, therefore, rise in price and make money when volatility rises, and short options rise in price and lose money when volatility rises.In the example above, the difference between the center and lowest strike prices.00, and the net credit received.20, not including commissions.A bull put spread is a limited-risk, limited-reward ver putas maduras strategy, consisting of a short put option and a long put option with a lower strike.The best that can happen is for the stock to be above the higher strike price at expiration.Variations, a vertical put spread can be a bullish or bearish strategy, depending on how the strike prices are selected for the long and short positions.Butterfly spreads are sensitive to changes in volatility (see Impact of change in volatility).For example, if the underlying instrument moves enough, you may be able to close out the spread position at a net profit prior to expiration.If the stock price is below the highest strike and at or above the center strike, then the highest strike short put is assigned.The initial net credit is the most the investor can hope to make with the strategy.What is a 'Bull Put Spread'.While the near-term put may often have a lower Delta, its Gamma may be higher (if the strike is at-the-money).
The net price of a butterfly spread falls when volatility rises and rises when volatility falls.
Bull put spreads are best used for a consolidating market or when you think the market/stock will rise.
In that situation, the loss would be the cost of buying back the longer-term option less the premium received when the position was initiated.In general, an options rate of time decay increases as its expiration draws nearer.Below the lower strike price, profits from exercising the long put completely offset further losses on the short put.And be aware, a situation where a stock is involved in a restructuring or capitalization event, such as for example a merger, takeover, spin-off or special dividend, could completely upset typical expectations regarding early exercise of options on the stock.It would take careful pinpointing to forecast when an expected decline would end and the eventual rally would start.As an options trader, I would like to know two things before I put on a trade: 1) my profit potential, and 2) how much capital I am risking.Bear call spreads are best on when you think the market/stock is topping.While the longer-term outlook is secondary, there is an argument for considering another alternative if the investor is bullish on the stock's future.This strategy generates net up-front premium income, which represents the most the investor can make on the strategy.Motivation, investors initiate this spread either as a way to earn income with limited risk, or to profit from a rise in the underlying stock's price, or both.
While the long puts (center strike price) in a short butterfly spread have no risk of early assignment, the short puts do have such risk.
Second, the long 100-share position can be closed by exercising one of the center-strike long puts.