What Is a Put Credit Spread?
A put credit spread (also known as a bull put spread) is an options strategy that generates income by simultaneously selling a put option at a higher strike price and buying a put option at a lower strike price, both with the same expiration date. You receive a net credit (the premium from the sold put minus the cost of the bought put), and this credit is your maximum profit. The bought put limits your downside risk, making this a defined-risk income strategy.
Put credit spreads are popular among income-focused options traders because they offer a high probability of profit, defined risk, and lower margin requirements than selling naked puts. They profit when the stock stays above the short put strike at expiration, which can happen if the stock rises, stays flat, or even drops slightly.
SELL a higher-strike put (collect premium) + BUY a lower-strike put (pay less premium) = NET CREDIT. You profit if the stock stays above the short put strike. Maximum risk is the spread width minus the credit received.
Put Credit Spread Formulas
Put Credit Spread Example
- 1Net credit = $3.50 - $2.00 = $1.50 per share
- 2Total credit received = $1.50 x 100 = $150
- 3Spread width = $440 - $435 = $5.00
- 4Maximum loss = ($5.00 - $1.50) x 100 = $350
- 5Breakeven = $440 - $1.50 = $438.50
- 6Probability of profit: approximately 70-75%
- 7Return on risk = $150 / $350 = 42.9%
When to Use Put Credit Spreads
- You have a neutral to moderately bullish outlook on the stock or market
- You want to generate income with defined risk (unlike naked puts)
- Implied volatility is elevated, making the credit received more attractive
- You want a high probability trade (typically 65-80% success rate)
- You prefer to use less capital than selling cash-secured puts
- You want to profit from time decay without unlimited downside exposure
Put Credit Spread vs Cash-Secured Put
| Feature | Put Credit Spread | Cash-Secured Put |
|---|---|---|
| Capital Required | Spread width x 100 ($350-$500 typical) | Strike x 100 ($4,000-$10,000+) |
| Maximum Risk | Spread width - credit | Strike - premium |
| Maximum Profit | Net credit | Premium received |
| Probability of Profit | 60-80% typical | 65-85% typical |
| If Assigned | Short stock position (or roll) | Buy 100 shares at strike |
| Return on Capital | 20-50% per trade | 1-4% per trade |
Managing Put Credit Spreads
The most common management technique is to close at 50% of maximum profit. If you received $1.50 credit and the spread is now worth $0.75, buy it back to lock in $0.75 profit. This captures 50% of the maximum gain in typically 40-60% of the time, improving your annualized return and reducing the probability of a late reversal wiping out gains.
If the stock drops toward the short put strike, you can roll the spread down and out (close current, open new spread at lower strikes with later expiration) to give the position more room. If the stock drops below the short put, consider closing the position to limit losses rather than hoping for a recovery.
If the stock drops below the short put strike near expiration, you may be assigned. This means you must buy 100 shares at the short put strike. However, your long put limits your loss to the spread width minus credit. Close the spread before expiration if the short put is ITM to avoid assignment complications.