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Put debit spread
A put debit spread (bear put spread) is a two-legged, defined-risk, bearish option strategy. You buy a higher-strike put and sell a lower-strike put with the same expiration, paying a net debit. The chart below shows a put debit spread with long put strike 100 at $5, short put strike 95 at $2, and the profit/loss diagram.
Greeks and this strategy
| Greek | How it behaves |
|---|---|
| Delta | Negative. Bearish exposure capped by the short lower-strike put. |
| Theta | Negative. Time decay hurts when the underlying does not fall. |
| Gamma | Positive but limited. Delta becomes more negative on declines; profit is capped on large drops. |
| Vega | Positive. Higher implied volatility raises spread value; falling IV hurts. |
Overview of put debit spread
A put debit spread combines a long put at a higher strike with a short put at a lower strike. The short put reduces the cost of the long put and caps maximum profit at the spread width minus the net debit paid. Maximum loss is limited to the net debit. Each contract represents 100 shares of the underlying (relevant for the US market).
Market outlook for put debit spread
Traders open a put debit spread when they expect the underlying price to fall moderately before expiration. Unlike a long put, the short lower-strike put limits downside profit but also lowers the entry cost. This strategy expresses a bearish view with defined risk and lower capital requirement than buying a put outright.
How to open a put debit spread
Open the position by buying a put at the higher strike and simultaneously selling a put at the lower strike. Both orders are typically placed as a single vertical spread order. The net debit paid is the long put premium minus the short put premium. Strike selection, expiration, and implied volatility determine the trade's risk/reward profile.
Profit/loss diagram for a put debit spread
Maximum loss equals the net debit paid and occurs if the stock is at or above the long strike at expiration. Maximum profit equals the spread width minus the net debit. For example, buying a $100 put for $5.00 and selling a $95 put for $2.00 creates a $3.00 debit on a $5.00-wide spread. Maximum loss is $300 per contract and maximum profit is $200 per contract. The upper break-even at expiration is the long strike minus the net debit, or $97 in this example.
How to enter a put debit spread
Submit a vertical put debit spread order to your broker, specifying the long and short strikes and a limit price for the net debit. The order is filled when the market accepts your limit debit or better. Opening the spread debits your account for the net premium plus commissions.
How to exit a put debit spread
Close the spread before expiration by selling the long put and buying back the short put as a single order. If the spread value has increased above the entry debit, you realize a profit. At expiration, if the stock is below the short strike, both legs may be exercised or cash-settled according to your broker's rules, delivering the spread's maximum value.
The impact of time decay on a put debit spread
Time decay works against the put debit spread when the underlying remains above the long strike, eroding the value of both puts. If the stock falls and both puts retain intrinsic value, time decay has less impact near expiration. Rising implied volatility tends to increase the spread value; falling volatility can reduce it.