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Bull Put Spreads

Summary

A bull put spread (otherwise known as put credit spread) is an options strategy where Thetanuts buy one put option and sell another put option with the same expiration date but at a lower strike price. The goal of the bull put spread is for the spot price of the underlying asset to be above the strike price of the sold put option, which allows both puts to expire worthless.

Benefits

Unlike vanilla cash-secured put or covered calls where users are required to fully collateralize their positions, users of the bull put spread only need to collateralize the range between the sold and bought strike price of the put options. This promotes capital efficiency and allows users to maximize their yield and obtain synthetic leverage if the user wish to.

Who uses Bull Put Spreads?

The bull put spread is suitable for users who are short-term bullish on the underlying asset.

Risk Parameters

In Thetanuts's case, the bull put spread would be selling 20 delta strikes and buying back 15 delta strikes on the spreads. This provides users with a net 5 delta exposure. Please read here for more information about delta.
Strikes are selected based on these parameters at 0900 UTC on Fridays, when auctions are conducted.

Understanding the Risk-Reward Profile

There are 3 main scenarios when considering using the bull put spread strategy. To illustrate these scenarios, these are the parameters:
  1. 1.
    The initial spot price of ETH is $2,000
  2. 2.
    A user deposits $1,000 USDC into the bull put spread vault.
  3. 3.
    The strike price of the sold put option is $1,900.
  4. 4.
    The strike price of the bought put option is $1,800.
  5. 5.
    The weekly yield of the bull put spread is 15% ($150)
Scenario 1: The spot price of ETH increases to $2,100 at expiry (the spot price is above the strike prices of the sold and bought put option)
  1. 1.
    Both put options expire worthless and the user would retain his/her initial deposit while earning the weekly yield of $150
  2. 2.
    New Net Position: $1,000 (initial deposit) + $150 (weekly yield) = $1,150
Scenario 2: The spot price of ETH decreases to $1,850 at expiry. (the spot price is above the strike price of the bought put option but below the sold put option)
  1. 1.
    The sold put option is exercised while the bought put option expires worthless. The losses in the initial deposit have a linear relationship between the strike price range of the sold and bought put options.
  2. 2.
    Users would still earn the weekly yield of $150
  3. 3.
    New net position: - $1,000 (initial deposit) x 50% (% in between strike range) + $150 (weekly yield) = - $350
Scenario 3: The spot price of ETH decreases to $1,750 at expiry. (the spot price is below the strike prices of the sold and bought put option)
  1. 1.
    Both put options are exercised and the user would lose all of his/her initial deposit while earning the weekly yield of $150
  2. 2.
    New net position: -$1,000 (initial deposit) + $150 (weekly yield) = - $850