Deep ITM Bull Put Spread — Introduction

Deep ITM Bull Put Spread — Classification

What Is Deep ITM Bull Put Spread

Deep ITM Bull Put Spread is simply a Bull Put Spread using deep in the money strike prices. A regular Bull Put Spread writes at the money put options and then buy out of the money put options in order to partially offset margin requirements and to put a ceiling to the maximum loss of the position. This resulted in an options trading position which profits when the price of the underlying stock goes both sideways or upwards with greater maximum loss potential than maximum profit potential. This means a negative reward risk ratio.

However, when strike prices are moved in the money, the reward risk ratio of the position starts to come around and will come to a point when it becomes positive. Like a regular bull put spread, a deep in the money bull put spread requires the price of the underlying stock to close above the short strike in order to return its maximum profit potential. Because in the money put options are used instead, the price of the underlying stock would need to rally strongly in order to get above the short strike price. However, this results in a reward risk ratio as high as 9:1 due to the extremely small maximum loss of the Deep ITM Bull Put Spread.

The Deep ITM Bull Put Spread’s amazing reward risk ratio comes from the extremely small maximum loss potential. This is a result of the long put leg being in the money and would rise in value almost dollar for dollar with the short put leg if the price of the underlying stock goes downwards instead. The long put leg in a regular bull put spread is out of the money and would require the price of the underlying stock to drop significantly in order to take it in the money before it is able to completely hedge against the loss on the short leg.

When To Use Deep ITM Bull Put Spread?

The Deep ITM Bull Put Spread could be used when one expects the price of the underlying stock to move up significantly by options expiration. wants as low a maximum loss potential as possible and has an options trading account level high enough for credit spreads.

How To Use Deep ITM Bull Put Spread?

Deep ITM Bull Put Spread consists of writing a deep in the money put option with the buying of the same amount of put options of the same expiration month at a lower in the money strike price.

Buy ITM Put + Sell Deep ITM Put

Deep ITM Bull Put Spread Example