Bull put spread
A systematic options approach—Bull put spread—defined by explicit rules, testable on history, and fragile when costs or regimes change.
Overview
This is a vertical spread consisting of a long position in an OTM put option with a strike price K1, and a short position in another OTM put option with a higher strike price K2.
Bull put spread sits in the Options chapter of the systematic catalog. On QUSXFI we treat it as a testable hypothesis: specify entries, exits, sizing, and costs—then ask whether edge survives out-of-sample scrutiny.
Discretionary traders often arrive at similar ideas intuitively; the quantitative version forces you to write the rule before you see the next bar. That discipline is what makes results reproducible—or exposes them as luck.
Based on the research catalog 151 Trading Strategies (Kakushadze & Serur, 2018), section 2.7. Educational summary—not a replication of the full formal definition.
Defined-Risk Spread Logic
Leg risk on Bull put spread means partial fills create naked exposure; flatten rules belong in the spec before entry.
Map every input Bull put spread needs in Options—prices, vol surfaces, fundamentals, or legal milestones—and verify point-in-time integrity.
Implementation and Research Process
Implement Bull put spread as atomic spread orders with legging rules—partial fills define your risk before direction does.
Tag dividend dates for Bull put spread; early assignment on the short leg can appear inside 'defined risk' structures.
Compare Bull put spread debit paid to theoretical max loss; slippage at entry is often the hidden fifth leg.
Risk: What Breaks This Strategy
Vertical structures like Bull put spread cap profit deliberately; the tail you think you removed can reappear via early assignment or dividend dates on American options.
Liquidity on the long leg vanishes first in stress—you may exit the spread at fire-sale prices even if direction was right.
Pin at the short strike creates gamma you did not model if you hold through expiry.
Common Mistakes to Avoid
- Deploying Bull put spread live before paper trading through at least one adverse Options month.
- Holding Bull put spread through pin at the short strike while gamma explodes.
- Changing Bull put spread parameters after each losing week—implicit discretion destroys reproducibility.
- Reporting Bull put spread backtests without fees, slippage, and realistic fill rules.
How to Study This Strategy
- Restate Bull put spread (§2.7) as numbered rules another researcher could implement cold.
- Run a paper book on Bull put spread for a full signal cycle; export trades and tag regimes manually.
- Map Bull put spread to Basic Trading chart concepts you will use as filters—not as substitutes for rules.
- List every data field Bull put spread needs in Options; verify point-in-time integrity.
- Add conservative costs to Bull put spread; rerun with 2× spreads and compare drawdown paths.
Key Takeaways
- Bull put spread defines max profit and loss by construction—your job is whether that box fits the regime you are trading.
- Leg risk on Bull put spread means one side fills and the other does not; have a flatten rule before entry.
- Early assignment on American shorts can appear inside verticals you labeled defined-risk.
- Pin at the short strike adds gamma near expiry that linear payoff diagrams hide.
- Verticals in Bull put spread are not substitutes for direction bets with wider targets—accept the cap deliberately.
Learning Tip
File a dated note after each Bull put spread paper session: what worked, what broke, what you will not override next time.
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