Bull Put Spread Payoff Function & Example: Options, Futures, Derivatives & Commodity Trading

# Bull Put Spread Payoff Function & Example

Details about Bull Put Spread Payoff Function Chart explained with an example
As mentioned in our previous article Bull Put Spread: Trading Example, The Bull Put Spread is one of simple options spread trading strategy which can be constructed simply by taking 2 Put positions:

The Bull Put Spread is one of simple options spread trading strategy which can be constructed simply by taking 2 positions:
1) Buy or Long an Out of the Money (OTM) Put Option and

2) Sell or Short an In the Money (ITM) Put Option
So you need an ITM Short Put and OTM Long Put. Suppose that you take ITM short Put at the strike price of \$33 (GREEN Graph) and OTM long put at the strike price of \$27 (the PINK Graph), when the underlying Microsoft stock is trading at \$30. Suppose that the ITM Put sale gives you \$5 and OTM Put buy is for \$2. So you net receive \$3 from this Bull Put Spread position.

## Bull Put Spread Payoff Function

Now, let's add the two. Since its a PUT combination, we need to start from the RIGHT side.
- above \$33, both PINK and GREEN graphs are ZERO, so net payoff function above \$33 remains ZERO
- between \$27 and \$33, the PINK graph is ZERO, while the Green graph is slanting downwards. Zero PINK + Down Slanting Green = Down Slanting Green
- Between \$0 and \$27, PINK graph is slanting upwards and GREEN graph is slanting downwards. Up and dow slants cancel each other and you get a horizontal line.
The net graph is displayed by the RED graph, but this is still without price consideration (of \$5 received and \$2 paid = \$3)
Now continuing further from our previous explaination, lets introduce the price of \$3 also. Since we are receiveing the \$3 net from these 2 positions, the net RED graph for the Bull Put Spread will shift upwards by this amount of \$3. Hence, you finally get the BLUE graph of the net Bull Put Spread position.

What is the maximum Loss in a Bull Put Spread?
The maximum loss in the Bull Put Spread = Strike Price of Short Put - Strike Price of Long Put - Net Premium Received + brokerage commission paid
So in the above example, the net loss will be \$33 - \$27 - \$3 + brokerage commission paid = \$3 + Brokerage

What is the maximum profit in a Bull Put Spread?
The maximum profit in bull Put spread is capped.
Maximum Profit in Bull Put Spread = Net Premium Received - Brokerages Paid

Comparison of Bull Call Spread and Bull put Spread:
Now, interesting thing is that both the Bull Call Spread and Bull put Spread are for bullish views on the undelrying stock i.e. both spread will give buyer profit when the underlying price goes up. Then what's the difference?
The main difference is that in the Bull Put Spread, you are a net RECEIVER of money, as you short an ITM Put costing more money, and long an OTM put costing less money, so you are net receiever of premium.
While in the case of Bull Call Spread, you a net GIVER of money, since you BUY an ITM call costing your more and SELL and OTM call giving you less. Hence you are net Giver.
So when you have a bullish view on an underlying stock or index, you can take the safe bet of going either by Bull Call spread or Bull Put Spread. Depending upon whether you have money or you want to receive money, you can take the Bull Call spread and Bull Put Spread positions, respectively
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