Put Credit Spread

What is Put Credit Spread?

Put Credit Spread A put credit spread (also called a bull put spread) is a defined-risk premium-selling strategy with a bullish to neutral bias. Structure: sell 1 out-of-the-money put, buy 1 further out-of-the-money put as protection. The trader collects net credit and profits if the underlying stays above the short put strike at expiration. The long put caps the maximum loss at (wing width − credit received). Mechanics: - Sell 1 OTM put (higher strike, e.g., 16-delta) - Buy 1 further OTM put (lower strike, the protection wing) - Equal contracts on both legs, same expiration - Net credit collected Worked example: SPY at $540, 30 DTE put credit spread - Sell 1 SPY $530P at $2.10 - Buy 1 SPY $525P at $1.10 - Net credit: $1.00 ($100 per contract) - Max profit: $100 if SPY closes above $530 at expiration - Max loss: $5 wing − $1 credit = $400 if SPY closes below $525 - Break-even: $529 (short strike − credit) - POP at entry: ~70% with 16-delta short strike - Reward-to-risk: 0.25× — small wins, occasional larger losses - Capital required: $400 per contract Why traders use put credit spreads: - **Bullish bias with defined risk**: profit if the underlying rises, stays flat, or even drifts down a small amount - **High probability of profit**: 65-75% win rate at 16-delta short strikes - **Capital-efficient income**: lower capital required vs cash-secured puts (~$400 vs $53,000 for SPY) - **No assignment risk if managed properly**: close before expiration to avoid pin risk Put credit spread vs cash-secured put: - **Same directional bias** (both bullish/neutral) - **PCS**: $400 capital, $100 max profit, $400 max loss — defined-risk - **CSP**: $53,000 capital, $210 max profit, $52,790 max loss (stock to zero) — large potential loss - **Per dollar of capital**: PCS yields ~25% on max profit; CSP yields ~0.4% - Use PCS for capital efficiency; use CSP when you'd want to own the shares When put credit spreads work: - **IV rank above 50**: premium is rich enough to justify the locked capital - **Bullish or neutral directional view**: bullish bias rewards the structure - **30-45 DTE entries closed at 50% max profit**: sweet spot for theta accrual vs gamma risk - **Liquid underlyings**: tight bid-ask spreads minimize slippage on the 4-leg trade When put credit spreads fail: - **Sharp directional moves**: a 5%+ drop past the short strike accelerates losses - **Vol expansions**: short-vega position hurt by rising IV - **Hold-to-expiration**: gamma risk inside 14 DTE converts winners into losers Put credit spreads are one of the most common retail premium-selling strategies because they combine defined risk, high win rate, and capital efficiency. The naming convention varies — "put credit spread" emphasizes the cash flow, "bull put spread" emphasizes the directional bias. They refer to the same structure.