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Bull Put Spread Break-Even Price - YouTube
Channel: Option Alpha
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hey everyone this is kirk here again in
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option alpha and in this video we're
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going to walk through
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a bold put spread break even price
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calculation you might also hear people
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call this
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a bullish spread
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as well also a
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short put spread it's another common
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name for this but
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the end result is that it's all
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basically the same stuff so a bull put
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spread
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or a bull credit spread or short put
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spread
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or a short credit spread i mean there's
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all kinds of
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different ways you can say it but
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essentially what we're going to do is
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going to go through
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exactly how to figure out and calculate
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the breakeven price
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so we're just going to use a very simple
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payoff diagram structure which is here
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and what we need on top of this is we
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need the
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payoff diagram for the bull put spread
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so this is the payoff diagram for the
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bull put spread
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it looks like this and you can see it
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has defined profit on the top side
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and it has defined risk on the bottom
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side as well
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and it basically pivots at these two
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points here
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now these two points here are where you
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sell the different
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contracts for this bull put spread in
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this case you would be selling one put
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option at a lower strike say 90
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as a strike price and you would buy
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another put option
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at an even lower price than where you
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sold this put option at
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so let's say you bought this one here
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for 85
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dollars so you sold this one for at the
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90 strike
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you bought this one at the 85 strike and
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now what we have to figure out is we
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have to figure out what
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this breakeven point is now the way that
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you do this is actually
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fairly simple all you're going to do is
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you're going to figure out what the net
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credit is
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between selling the put option here and
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buying the put option here as part of
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your spread
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you need to figure out what that net
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credit is that you collected
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now since we're doing a bold put spread
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we usually collect a credit on trade
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entry
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so we're going to use that credit to
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calculate our breakeven price
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in a second so let's assume that we sold
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the first
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90 strike put credit spread for a three
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dollar credit
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so we collected three dollars in premium
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and we had to use some of that premium
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to buy the 85 strike put option here
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let's assume we had to use two dollars
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and 25 cents
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to buy that put option so we sold the
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90 strike put option for three dollars
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we used
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part of that three dollar premium 2.25
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cents to buy the
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85 strike put option and that leaves us
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with a total credit
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of 75 cents now that total credit that
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we collected not only is just our max
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profit
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but is also a way that we can use that
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credit to calculate
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our breakeven point so the break-even
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point is essentially calculated doing
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the following
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you take your short strike here which is
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the 90 strike
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option 90 strike price you subtract
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from that 90 strike price the credit
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that you collected which is here
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so in this case we subtract 75 cents
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and then the resulting answer is our
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breakeven point so in this case
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that would be 89 25 would be our
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breakeven point
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that is the price point right here and
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you can see it's always
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less than the initial strike price here
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at 90. so if we just draw like a dotted
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line here
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you can see that that data point here is
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the 90 strike
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if this data point here is the 85 strike
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and we're trying to figure out something
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in between that's our breakeven point
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we just take the 90 strike short
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contract
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subtract the credit that we received
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which is 75 cents
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and that gives us our new blended
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breakeven point of 89.25
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so essentially what that means is as
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long as the stock trades anywhere above
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89.25 then we should have an opportunity
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to make money
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at expiration so when you get into these
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contracts usually
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the stock will be trading higher so
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let's say the stock's trading up here 95
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dollars
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you might still sell the 90 strike put
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by the 85 strike put
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to create this bull put spread but if
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the stock actually goes lower
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this is where calculating that breakeven
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point can help because technically the
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stock can go
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all the way down to 89.25 it could
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potentially close
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just above that level and you still have
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an opportunity to make money at
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expiration
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so hopefully this helps out as always if
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you guys have any questions let us know
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and until next time
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happy trading
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