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Option Strategy - Bull Put spread 

 
 

Strategy's Description:

  
  Selling short in the money Put and buying a Put option at a lower OTM strike.  Strategy's outlook for this financial instrument is bullish in the short-term.  According to its typical characteristics, it will usually lose value through time decay. Eventually, if the short contracts strike price will be bellow the financial instruments price at expiration, both contracts will end up worthless. If the short strike price will end above the instrument's price, it will worth its intrinsic value and the lower strike will end worthless. Most likely, the short contract's counterparty will assign your position.  
   Bull Put spread profit and loss graph, current time and at expiration  
 
Prospect Direction: the stock will be short termed bullish, considering the duration and implied volatility disadvantages. As you already know that, when a financial instrument declines normally its 'IV' values will increase and for this strategy, this is a bad news.
Profit Potential: selling the upper strike will enforce a profit cap usually the premium received structuring this setup.
Loss potential: On the other hand, buying this lower strike will minimize the risk. We will explore most of pros and cons concerning this strategy.
Risk reward: the floor, made by the long Put option that will put a stop loss, divided by the cap made by the short Call higher strike that will put a stop to the profit.
Breakeven point at expiration: premium received- paid plus lower strike equal to the financial instruments market price.
Time factor: The setup's first leg is the long Put, which will lose with time decay. If all other variables stay unchanged, a long option contract typically loses a time value with every passing day, and the rate of time value loses tends to accelerate as it reaches to the end of its term, the expiration date.   The second setups leg is the short put. As with short option strategies, the passage of time has a positive impact to the short seller. Time remaining to expiration decreases the statistical chances for a loss and the intrinsic value shrinks, too.
Implied volatility: Generally, an increase in implied volatility would affect a negatively on this strategy, all other variables being equal. Volatility tends to boost the value of any options, because it indicates a greater statistical probability that the stock will move enough to give the option intrinsic value by the expiration day. On the other hand, a decline in volatility has a tendency to lower option's value, regardless of the overall stock price trend, although this strategy influenced negatively by the implied-volatility's increments.
Dividends: dividend affects negatively on Put option contract short seller. On an ex-dividend date, the amount of the dividend will deduct from the value of the underlying stock. The second setup's leg is the long put, which will gain from the dividend deduction.