When the market is volatile and you are moderately bullish on it, you might consider a Bull Put Spread. This strategy involves selling a put option at one strike price and buying a put on the same asset at a lower strike price (further out-of-the-money). Usually both options will have the same expiration date. This strategy is also referred to as a Bullish Credit Spread.
This strategy has a profit/loss picture that is similar to a Bull Call Spread, however in this case, there is a net premium that goes into your trading account when you establish the position, whereas with the Bull Call Spread, you are paying out a premium when you establish the position. Like the Bull Call Spread, this strategy has limited risk but also limited profits.
This strategy is a bullish strategy, like selling naked puts, that puts premium into your account when you establish the position. However it limits your risk by the purchase of lower priced puts, protecting you if the price drops significantly.
With this strategy, your potential profit is limited to the premium you collected for the puts you sold less commissions and the premium you paid for the puts you bought. Your potential losses are limited to the difference between the strike prices multiplied by 100 times the point value of the contract, less the cost of establishing the position. An option calculator such as Option-Aid performs these calculations for you instantaneously.
When we initiate a Bull Put Spread, the put we buy has the same expiration date, with a lower strike price (at a price point that we feel sufficiently limits our risk, without significantly lowering the premium we are collecting.
It is also important to cover risks and caveats of this strategy.
The risk of this position is limited and known as described above. Remember that the commission you pay for this position will be higher than the commission for a straight option play, because you are initiating two related option transactions.
When you initiate a Bull Put Spread, you are limiting your upside potential. If the asset price rockets skyward, then you aren't able to fully participate in that gain like you would if you had purchased a call.
It is important to analyze your expectations for the underlying asset and for the market before selecting your strategy.
