This is a past recommendation on PBL which demonstrates how the bull put spread strategy works in real life.
Bull Put Spread
Sell 10 PBL39 Oct 1950 Puts @ 22
Buy 10 PBL36 Oct 1900 Puts @ 12
Net Credit = 10 cents
This trade requires minimal margin requirements.
The ideal result is for both options to expire worthless, so that maximum premium is retained from the credit spread.
= Net Premium Received
= Sold Put Premium – Bought Put Premium
= (0.22 – 0.12) x 10 contracts
This will occur if the share price is below the bought at expiry
= Difference between strike prices less net premium received
= 50 – 10
= 0.40 x 10 Contracts
Upper strike less net premium received
= 19.50 – 0.10
Main Benefits of Strategy
1. Provides leveraged exposure to a rise in the share price
2. Takes advantage of time decay
3. The ideal result is for the options to expire worthless, which means the client will save on brokerage not having to close the position to take a profit.
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