A transaction that aims to create a short position in a security without actually selling it. While holding the short position, for example through a put option, a bullet trade allows a market participant to capitalize on a security’s bearish move. The security is traded by means of a single, lump-sum payment at maturity. Bullet trades are carried out through a straightforward payment schedule: a single payment at the end of the investment term (hence the nomenclature).

A market participant can establish the trade by buying an in-the-money (ITM) put option in which a given security is an underlying (a case known as an in-the-money put option bullet trade). Using the put option, the security can be sold sold short. The option would be exercised if it remains in the money during the term of the trade. To exercise the option the put holder would need to buy the security at its market price and then sell it to a counterparty at the strike price.

Bullet trade may also involve a long position in a security without actually buying it. In an in-the-money call option bullet trade, the call option holder would need to exercise the option, obtain the security, and immediately sell it in the market.