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Deep ITM Bull Put Spread  Introduction
The Deep In The Money Bear Call Spread is a complex bullish options strategy with limited profit and limited loss. It is an unique bullish strategy that has reward risk ratio so high that it could even become an arbitrage position when certain conditions are met!
This free options strategy tutorial shall explore the Deep ITM Bull Put Spread in depth, explain how to use it, how to turn it into an arbitrage, its calculations and more.
Deep ITM Bull Put Spread  Classification
Strategy : Bullish

Outlook : Sustained Bullish

Spread : Vertical Spread

Debit or Credit : Credit
What Is Deep ITM Bull Put Spread
Deep ITM Bull Put Spread is simply a Bull Put Spread using deep in the money strike prices. A regular Bull Put Spread writes at the money put options and then buy out of the money put options in order to partially offset margin requirements and to put a ceiling to the maximum loss of the position. This resulted in an options trading position which profits when the price of the underlying stock goes both sideways or upwards with greater maximum loss potential than maximum profit potential. This means a negative reward risk ratio.
However, when strike prices are moved in the money, the reward risk ratio of the position starts to come around and will come to a point when it becomes positive. Like a regular bull put spread, a deep in the money bull put spread requires the price of the underlying stock to close above the short strike in order to return its maximum profit potential. Because in the money put options are used instead, the price of the underlying stock would need to rally strongly in order to get above the short strike price. However, this results in a reward risk ratio as high as 9:1 due to the extremely small maximum loss of the Deep ITM Bull Put Spread.
The Deep ITM Bull Put Spread's amazing reward risk ratio comes from the extremely small maximum loss potential. This is a result of the long put leg being in the money and would rise in value almost dollar for dollar with the short put leg if the price of the underlying stock goes downwards instead. The long put leg in a regular bull put spread is out of the money and would require the price of the underlying stock to drop significantly in order to take it in the money before it is able to completely hedge against the loss on the short leg.
When To Use Deep ITM Bull Put Spread?
The Deep ITM Bull Put Spread could be used when one expects the price of the underlying stock to move up significantly by options expiration, wants as low a maximum loss potential as possible and has an options trading account level high enough for credit spreads.
How To Use Deep ITM Bull Put Spread?
Deep ITM Bull Put Spread consists of writing a deep in the money put option with the buying of the same amount of put options of the same expiration month at a lower in the money strike price.
Buy ITM Put + Sell Deep ITM Put
Deep ITM Bull Put Spread Example
Assuming QQQ is trading at $63 and its May $66 strike price put options are trading at $3.06 and $71 strike price put options are trading at $7.94.
Buy To Open 1 contract of May $66 Put at $3.06
Sell To Open 1 contract of May $71 Put at $7.94
Net Credit = $7.94  $3.06 = $4.88

Choosing Strike Price and Expiration Month for Deep ITM Bull Put Spread
The choice of expiration month depends on how long you think it will take the price of the underlying stock to rally above the strike price of the short put options. If you expect an extremely quick rally, then using the nearest expiration month is ok but if you expect the rally to be completed in 3 months, then using options with at least 3 months to expiration would be in order. As Deep ITM Bull Put Spreads typically have a very far breakeven point,
sufficient time should be given for such a move to happen.
The choice of strike price for the short put options depends on how high you think the price of the underlying stock would rally to and beyond. In the example above, we are expecting QQQ to rally to and beyond $71, hence writing the $71 strike price put options. Bear in mind that the higher the strike price of the short put leg, the higher the maximum profit potential would be but the more the price of the underlying stock needs to rally in order to achieve maximum profit and breakeven.
Deep ITM Bull Put Spread Arbitrage
Deep ITM Bull Put Spread can become an arbitrage position with no possibility of loss. In this case, instead of making a loss when the price of the underlying stock remain stagnant or drops, it will make a very small profit and make a big profit if the price rallies strongly, resulting in the risk graph below.
This happens when the net credit of the position exceeds the difference between the strike prices. This could happen naturally or it could happen by legging into the position successfully.
Deep ITM Bull Put Spread Arbitrage Example 1
Assuming QQQ is trading at $63 and its May $66 strike price put options are trading at $3.06 and $71 strike price put options are trading at $8.10.
Buy To Open 1 contract of May $66 Put at $3.06
Sell To Open 1 contract of May $71 Put at $8.10
Net Credit = $8.10  $3.06 = $5.04
Minimum profit = $5.04  (71  66) = $0.04 with no possibility of loss.
Deep ITM Bull Put Spread Arbitrage Example 2  Legging
Assuming QQQ is trading at $63 and its May $66 strike price put options are trading at $3.06 and $71 strike price put options are trading at $8.10. You
decided to leg into the position and managed to fill at the following prices:
Buy To Open 1 contract of May $66 Call at $3.06
Sell To Open 1 contract of May $71 Call at $8.10
Net Credit = $8.10  $3.06 = $5.04
Minimum profit = $5.04  (60  55) = $0.04 with no possibility of loss.

In both cases above, the Deep ITM Bull Put Spread would make a minimum profit of $0.04 with no possibility of loss, making it an arbitrage position.
Trading Level Required For Deep ITM Bull Put Spread
A Level 4 options trading account that allows the execution of credit spreads is needed for the Deep ITM Bull Put Spread. Read more about Options Account Trading Levels.
Profit Potential of Deep ITM Bull Put Spread
Deep ITM Bull Put Spreads achieve their maximum profit potential when the underlying stock closes at or below the short strike price by expiration. The profitability of a Deep ITM Bull Put Spread can also be enhanced or better guaranteed by legging into the position properly.
Profit Calculation of Deep ITM Bull Put Spread
Maximum Profit = Net Credit
Maximum Loss = Difference Between Strikes  Net Credit
Deep ITM Bull Put Spread Profit/Loss Calculation
Assuming QQQ is trading at $63 and its May $66 strike price put options are trading at $3.06 and $71 strike price put options are trading at $7.94.
Buy To Open 1 contract of May $66 Put at $3.06
Sell To Open 1 contract of May $71 Put at $7.94
Net Credit = $7.94  $3.06 = $4.88
Maximum Profit = $4.88
Maximum Loss = (71  66)  $4.88 = 5  4.88 = $0.12
Reward Risk Ratio = $4.88 / $0.12 = 40.6

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Risk / Reward of Deep ITM Bull Put Spread
Upside Maximum Profit: Limited
Maximum Loss: Limited
Break Even Points of Deep ITM Bull Put Spread:
A Deep ITM Bull Put Spread is profitable if the price of the underlying stock goes above the breakeven point.
Breakeven = Lower Strike + Maximum Loss Potential
From the above Deep ITM Bull Put Spread example :
Maximum Loss = $0.12, Lower Strike = $66
Breakeven = $66 + $0.12 = $66.12
This Deep ITM Bull Put Spread would start to become profitable when the price of QQQ rallies from $63 to $66.12 and beyond.
This means a rally of 4.95% in the price of QQQ in order to reach breakeven, which is a very significant upwards move. This
far breakeven point is one of the most significant disadvantage of the Deep ITM Bull Put Spread and why it should be used only
when a significant rally is expected.

Deep ITM Bull Put Spread Greeks
Delta: Positive
Deep ITM Bull Put Spreads have positive delta which allows it to profit as the price of the underlying stock goes up. This is characteristic of all bullish options strategies.
Gamma: Positive
Being slightly Gamma Positive, the delta of a Deep ITM Bull Put Spread will becoming increasingly positive as the price of the underlying stock goes up, increasing its profitability upwards.
Vega: Positive
Vega for Deep ITM Bull Put Spreads tends to be positive and will increase the value of the position when implied volatility goes up and decrease value when implied volatility goes down.
Theta: Slightly Negative
Deep ITM Bull Put Spreads are not significantly affected by Time Decay as the erosion of extrinsic value on the long legs are offset by the erosion of extrinsic value on the short leg. However, the long leg tends to decay slightly faster than the short leg, resulting in that bit of negative theta.
Advantages Of Deep ITM Bull Put Spread
:: Highest ROI of the complex bullish options trading strategies.
:: Able to achieve arbitrage when legged in correctly.
Disadvantages Of Deep ITM Bull Put Spread:
:: Requires margin.
:: Requires a big upwards move in order to become profitable.
Adjustments for Deep ITM Bull Put Spreads Before Expiration :
1. When the price of the underlying stock has rallied above the strike price of the short leg and is expected to stage a pullback, one could Buy To Close the short leg and hold the long leg, transforming the position into a Long Put in order to profit from the pullback.
2. When the direction of the breakout has become uncertain and that the price of the underlying stock has an equal chance of a significant downside breakout, one could add a Deep ITM Bear Call Spread to the position, transforming it into an ITM Iron Condor Spread to profit from a breakout in either direction. One could also close out the short leg and then buy another ITM Call option to transform the position into a Long Gut spread which also profits from a breakout in either direction. Such transformations can be automatically performed without monitoring using a Contingent Order.
3. The deeper in the money the short options are and the nearer to expiration it gets, the higher the chance of them getting assigned early. If that happens, the short put options will be replaced with the underlying stocks stocks bought at the strike price and transform the position from a Deep ITM bull put spread into a Synthetic Long Call with unlimited profitability to upside. If you think the stock is going to
continue going upwards, you can continue to hold this new position. If you are of the opinion that the stock is going to reverse downwards, you can close out the stock position and just hold on to the long puts.

