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Put credit spread
A put credit spread (bull put spread) is a two-legged, defined-risk, neutral-to-bullish option strategy. You sell a higher-strike put and buy a lower-strike put with the same expiration, collecting a net credit. The chart below shows a put credit spread with short put strike 100 at $5, long put strike 95 at $2, and the profit/loss diagram.
Greeks and this strategy
| Greek | How it behaves |
|---|---|
| Delta | Positive. Bullish bias with smaller magnitude than a short put alone. |
| Theta | Positive. Time decay benefits the position when the stock stays above the short put strike. |
| Gamma | Negative. Sharp declines increase negative delta exposure, though the long wing limits loss. |
| Vega | Negative. Volatility expansion hurts; contraction helps the credit spread seller. |
Overview of put credit spread
A put credit spread combines a short put at a higher strike with a long put at a lower strike. The long put limits the risk of the naked short put, so maximum loss is capped at the spread width minus the net credit received. Each contract represents 100 shares of the underlying (relevant for the US market).
Market outlook for put credit spread
Traders open a put credit spread when they expect the underlying price to stay above the short put strike through expiration, or at least not fall enough to threaten the collected premium. Selling puts farther out of the money increases the probability of success but reduces the credit received. This strategy is commonly used to express a bullish or range-bound view with defined risk.
How to open a put credit spread
Open the position by selling a put at the higher strike and simultaneously buying a put at the lower strike. Both orders are typically placed as a single vertical spread order. The net credit received is the short put premium minus the long put premium. Traders consider support levels, implied volatility, and the distance between strikes when structuring the trade.
Profit/loss diagram for a put credit spread
Maximum profit equals the net credit received and is realized if the stock is at or above the short strike at expiration. Maximum loss equals the spread width minus the net credit. For example, selling a $100 put for $5.00 and buying a $95 put for $2.00 creates a $3.00 credit on a $5.00-wide spread. Maximum profit is $300 per contract and maximum loss is $200 per contract. The lower break-even at expiration is the short strike minus the net credit, or $97 in this example.
How to enter a put credit spread
Submit a vertical put credit spread order to your broker, specifying the short and long strikes and a limit price for the net credit. The order is filled when the market provides at least your limit credit. Opening the spread credits your account with the net premium minus commissions.
How to exit a put credit spread
Close the spread before expiration by buying back the short put and selling the long put as a single order. If the spread can be closed for less than the original credit, you keep the difference as profit. At expiration, if both legs expire out of the money, the position expires worthless and you keep the full credit. If the stock falls below the short strike, assignment risk on the short put may require closing or rolling the position.
The impact of time decay on a put credit spread
Time decay generally benefits the put credit spread seller when the underlying stays above the short strike. As expiration approaches, extrinsic value declines on both puts, which tends to reduce the cost of closing the spread. Changes in implied volatility affect both legs and can influence the spread value before expiration.