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Option Strategies

Bull Put Spread

Introduction

Bull put spread, also known as long put spread, consists of buying an OTM put and selling an ITM put. Both puts have the same underlying Equity and the same expiration date. The OTM put serves as a hedge for the ITM put. The bull put spread profits from a rise in underlying asset price.

Implementation

Follow these steps to implement the bull put spread strategy:

  1. In the initialize method, set the start date, end date, cash, and Option universe.
  2. Select Language:
    def initialize(self) -> None:
        self.set_start_date(2017, 2, 1)
        self.set_end_date(2017, 3, 5)
        self.set_cash(500000)
    
        self.universe_settings.asynchronous = True
        option = self.add_option("GOOG", Resolution.MINUTE)
        self._symbol = option.symbol
        option.set_filter(lambda universe: universe.include_weeklys().put_spread(30, 5))

    The put_spread filter narrows the universe down to just the two contracts you need to form a bull put spread.

  3. In the on_data method, select the expiration and strikes of the contracts in the strategy legs.
  4. Select Language:
    def on_data(self, slice: Slice) -> None:
        if self.portfolio.invested:
            return
    
        # Get the OptionChain
        chain = slice.option_chains.get(self._symbol, None)
        if not chain:
            return
        
        # Select the put Option contracts with the furthest expiry
        expiry = max([x.expiry for x in chain])
        puts = [i for i in chain if i.expiry == expiry and i.right == OptionRight.PUT]
        if not puts == 0:
            return
    
        # Select the ITM and OTM contract strike prices from the remaining contracts
        strikes = [x.strike for x in puts]
        otm_strike = min(strikes)
        itm_strike = max(strikes)
  5. In the on_data method, select the contracts and place the orders.
  6. Approach A: Call the OptionStrategies.bull_put_spread method with the details of each leg and then pass the result to the buy method.

    Select Language:
    option_strategy = OptionStrategies.bull_put_spread(self._symbol, itm_strike, otm_strike, expiry)
    self.buy(option_strategy, 1)

    Approach B: Create a list of Leg objects and then call the combo_market_order, combo_limit_order, or combo_leg_limit_order method.

    Select Language:
    itm_put = [x for x in puts if x.strike == itm_strike][0]
    otm_put = [x for x in puts if x.strike == otm_strike][0]
    
    legs = [
        Leg.create(itm_put.symbol, -1),
        Leg.create(otm_put.symbol, 1)
    ]
    self.combo_market_order(legs, 1)

Strategy Payoff

This is a limited-reward-limited-risk strategy. The payoff is

POTMT=(KOTMST)+PITMT=(KITMST)+PT=(POTMTPITMT+PITM0POTM0)×mfee wherePOTMT=OTM put value at time TPITMT=ITM put value at time TST=Underlying asset price at time TKOTM=OTM put strike priceKITM=ITM put strike pricePT=Payout total at time TPITM0=ITM put value at position opening (credit received)POTM0=OTM put value at position opening (debit paid)m=Contract multiplierT=Time of expiration

The following chart shows the payoff at expiration:

Strategy payoff decomposition and analysis of bear call spread

The maximum profit is the net credit you received when opening the position, PITM0POTM0. If the underlying price is higher than the strike prices of both put contracts at expiration, both puts expire worthless.

The maximum loss is KOTMKITM+PITM0POTM0.

If the Option is American Option, there is a risk of early assignment on the contract you sell.

Example

The following table shows the price details of the assets in the algorithm:

AssetPrice ($)Strike ($)
OTM put5.70767.50
ITM put35.50835.00
Underlying Equity at expiration829.08-

Therefore, the payoff is

POTMT=(KOTMST)+=(767.50829.08)+=0PITMT=(KITMST)+=(835.00829.08)+=5.92PT=(POTMTPITMT+PITM0POTM0)×mfee=(05.92+35.505.70)×1001.00×2=2386

So, the strategy profits $2,386.

The following algorithm implements a bull put spread strategy:

Select Language:
class BullPutSpreadStrategy(QCAlgorithm): 
    def initialize(self) -> None:
        self.set_start_date(2017, 2, 1)
        self.set_end_date(2017, 3, 5)
        self.set_cash(500000)

        option = self.add_option("GOOG", Resolution.MINUTE)
        self.symbol = option.symbol
        option.set_filter(self.universe_func)

    def universe_func(self, universe: OptionFilterUniverse) -> OptionFilterUniverse:
        return universe.include_weeklys().put_spread(30, 5)

    def on_data(self, slice: Slice) -> None:
        if self.portfolio.invested: return

        # Get the OptionChain
        chain = slice.option_chains.get(self.symbol, None)
        if not chain: return

        # Get the furthest expiration date of the contracts
        expiry = sorted(chain, key = lambda x: x.expiry, reverse=True)[0].expiry
        
        # Select the put Option contracts with the furthest expiry
        puts = [i for i in chain if i.expiry == expiry and i.right == OptionRight.PUT]
        if len(puts) == 0: return

        # Select the ITM and OTM contract strikes from the remaining contracts
        put_strikes = sorted([x.strike for x in puts])
        otm_strike = put_strikes[0]
        itm_strike = put_strikes[-1]

        option_strategy = OptionStrategies.bull_put_spread(self.symbol, itm_strike, otm_strike, expiry)
        self.buy(option_strategy, 1)

Other Examples

For more examples, see the following algorithms:

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