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Now that we have described how to do a Bull Put Spread, let's go through an example. The put options you are going to use for this example are on the stock: Xerox, Inc. (XRX).

This example comes from the CallsAndPuts.com "Bull Put Spreads" data. Let's go through the procedures step-by-step. To summarize this option play:



This strategy requires the investor to sell in-the-money (higher) put options and buy out-of-the-money (lower) put options on the same stock with the same expiration date. This is also known as a vertical bull put spread. If the stock price closes above the in-the-money (higher) put option strike price on the expiration date, then the investor receives the maximum profit. If the stock price decreases below the out-of-the-money (lower) put option strike price at the expiration date, then the investor has a maximum loss potential of the difference between the two put option strike prices minus the net credit.


Net Credit = Money received from selling in-the-money puts - Money paid for buying out-of-the-money puts
Maximum Profit Potential = Net Credit Received
Maximum Loss Potential = Difference Between Strike Prices - Net Credit Received

1) You select XRX from the "July Bull Put Spreads" listing:

 

2) You select XRX based on the criteria you've established for a good Bull Put Spread candidate (This differs for each option investor based on risk versus reward criteria).

3) You access the Stock, Option, BB&RSI links and based on your risk versus reward criteria determine that XRX is your Bull Put Spread investment choice.

4) Let's also assume that you have an account with ETrade and want to place your put option orders for the Bull Put Spread positions.

5) Once you log into your account on www.etrade.com, access the Trading > Enter Option Order link. 

6) Place your option order to sell 5 in-the-money (higher) put option contracts (XRXSG = July $35) by selecting the following fields:

7) This sale of the in-the-money XRX put options is for 5 contracts at market price. If you want to have your sale execute at a specific option price, select the "Limit" radial button and enter the price.  

8) Now place your order to buy 5 out-of-the-money (lower) put option contracts (XRXSE = July $25) by selecting the following fields:



9) This purchase of the out-of-the-money XRX put options is for 5 contracts at market price. If you want to have your purchase execute at a specific option strike price, select the "Limit" radial button and enter the price.  

10) If the stock price closes above the in-the-money (higher) put option strike price on the expiration date, then the investor receives the maximum profit. If the stock price decreases below the out-of-the-money (lower) put option strike price at the expiration date, then the investor has a maximum loss potential of the difference between the two put option strike prices minus the net credit.

In summary:
Net Credit = Money received from selling in-the-money put option - Money paid for buying out-of-the-money put option
Maximum Profit Potential = Net Credit Received
Maximum Loss Potential = Difference Between Strike Prices - Net Credit Received

 

1. Covered Calls
2. Hedge Wrapper
3. Sell Naked Puts
4. Sell Naked Calls
5. Bull Put Spread
6. Bear Call Spread
7. Bull Call Spread
8. Bear Put Spread
9. Buy Calls
10. Buy Puts

CoveredCalls.com

Option Descriptions
1. Covered Calls
2. Hedge Wrapper
3. Sell Naked Puts
4. Sell Naked Calls
5. Bull Put Spread
6. Bear Call Spread
7. Bull Call Spread
8. Bear Put Spread
9. Buy Calls
10. Buy Puts
Option Examples
1. Covered Calls
2. Hedge Wrapper
3. Sell Naked Puts
4. Sell Naked Calls
5. Bull Put Spread
6. Bear Call Spread
7. Bull Call Spread
8. Bear Put Spread
9. Buy Calls
10. Buy Puts

Site Resources:

Bollinger Bands & RSI
How to Use Our Site
Characteristics and Risks of Standardized Options
Disclaimer
          
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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