Put credit spread
A put credit spread, also known as a bull put spread, is a neutral to bullish options strategy designed to profit from an underlying asset staying above a specific price. The strategy involves selling a put option while simultaneously buying another put option at a lower strike price. This limits your risk while still allowing you to generate income.
How a put credit spread works
- Sell a put: You sell a put option at a higher strike price, collecting a premium.
- Buy a put: You buy a put option at a lower strike price to cap your potential loss, costing a smaller premium than what you received from the short put.
The goal is for the underlying asset to remain above the strike price of the sold put option, allowing both options to expire worthless, so you keep the net premium.
Example
Here is an example of a put credit spread on SPX, illustrated by the smart visualization tool OptionStrat. The trader believes that SPX will stay above 5700 during the next two weeks - and sells a put with strike 5700 and buys another put with strike 5680. She collects a net premium of 495 dollars, which is the max profit. The max loss, on the other hand, is 1505 dollars, which is calculated as the distance between the put minus the net premium.
From the example we see that the max profit is reached if SPX stays above 5700. The breakeven price is at 5695.05, and the max loss is reached if SPX ends at 5680 or lower.