Volatility has remained surprisingly subdued despite increasing sanctions by the U.S. and European Union on Russia, and escalating violence in Gaza.

Although speculating on higher implied volatility has been a difficult proposition this year, one way you can generate strong returns is by using options — in this case, a strategy called a bull put spread — on an exchange-traded fund, or ETF, that tracks implied volatility.

How Bull Put Spreads Work

Buying a put option gives you the right (but not the obligation) to sell or short a stock at a specific price on or before a given date. You can sell puts to receive a premium from the options buyer, but you’re then required to buy the stock should it finish above said price by the given date.

A bull put spread is a combination of two put options. You sell a put that’s either “at the money” (strike price is the same as the stock’s current price) or “out of the money” (strike price is below the stock’s current price). Then you also buy a put at a lower strike price for protection. Because the put you sell is closer to the actual price of the stock, you should receive more for the sold put than what you paid for the bought put.

You use a bull put spread when you expect the stock to remain above the strike price of the put you sold until both options expire. The best-case scenario is the stock remains above the strike price, so both options expire worthless, letting you keep the entire net credit. The worst-case scenario is that the stock falls below the lower strike price, in which case you’d lose the difference between the strike prices (but keep the credit you received from selling the put).

For example, let’s say you think Apple (AAPL) will stay above $95 for the next two weeks. You could sell a $95 put for premium, then protect yourself against a stock-price cratering by also buying a $90 put. Specifically, selling an Aug 16 $95 put would give you 60 cents, and you would pay 10 cents to buy a $90 put — giving you a net credit of 50 cents.

If Apple stays above $95, you keep all 50 cents. The return on this example is 10% = $0.50 (premium) divided by $5 (which is the potential loss and the margin your broker would require for you to place the trade).

The most you could lose is $4.50 — the difference between the two strikes ($95 – $90 = $5), but factoring in the 50 cents you received in premium.

Just remember: Spreads that are more “out of the money” will yield a lower return, but they’ll give you more protection. At-the-money spreads will offer a higher return, but less chance of success.

A Bull Put Spread on UVXY to Capitalize on Volatility

With volatility at historically low levels, you can place a bullish put spread on an ETF that will increase in value if volatility moves higher — the ProShares Ultra VIX Shrt-Term ETF (UVXY), which seeks to replicate twice the return of the S&P 500 VIX Short-Term Futures Index.

Click to Enlarge As long as the UVXY remains above the strike price of the put that’s closer to the money, this put spread will pay out.

The trade:

• Sell the UVXY Aug 29 $24 put for 84 cents.
• Buy the UVXY Aug 29 $20 put for 10 cents, giving you a net credit of 74 cents.

The return on this trade is 18% = $0.74 divided by $4 (which is the potential loss and the margin your broker would require for you to place the trade).

The maximum loss is $4 minus the premium of 74 cents = $3.26.

This trade will pay out if the price of the UVXY remains above $24 by Aug. 29 when both options expire.

As of this writing, David Becker did not hold a position in any of the aforementioned securities.