In this strategy, one expects markets to go up

Bull Spread - Put Strategy (Definition)
A bull put spread is constructed by selling higher striking in-the-money put options and buying the same number of lower striking in-the-money put options on the same underlying security with the same expiration date. The options trader employing this strategy hopes that the price of the underlying security goes up far enough such that the written put options expire worthless.

Date: 28th July 2011
Nifty Value: 5485
  • Sell (write) one lot of 5700 Put (25 AUG 2011 expiry) at a premium of 231
  • Buy one lot of 5500 Put (25 AUG 2011 expiry) at a premium of 108.

123 Rs (231 - 108) per lot (Rs 6150) is credited to your account entering the above position. You will make profits if Nifty ends above 5592 at expiry (25 AUG 2011).

Below are the various profit/loss scenarios at expiry
  • Nifty ends above 5700 - You will make fixed profits of Rs 6150 (123 * 50)
  • Nifty ends between (5592 - 5700) - You will make profits ranging from (Rs 0 - Rs 6150)
  • Nifty ends between (5500 - 5592) - You will make losses ranging from (Rs 3850 - Rs 0)
  • Nifty ends below 5500 - Fixed losses of Rs 3850

If you are a smart trader, you will get opportunities before expiry to exit the bull spread strategy with decent profits even if Nifty does not rise above 5592.

(write:buy) ratio in the above example is 1:1 and the gap between write and buy contracts is 200 Points in Nifty. You can tweak the (write:buy) ratio and gap to build you own strategy based on your risk appetite.

Note: I did not include brokerage charges in the above example

Any views on this strategy are welcome. Let us know how it works for you.