Key Points
The put credit spread is a bullish options trading strategy with pre-defined maximum loss . It is comprised of a short put and a long put , and is sometimes also referred to as a “bull put spread” or “short put spread”
Trade
- Sell 1 put ATM or OTM –> This is short put leg
- Buy 1 put further OTM from short put –> This is long put leg
Trade Example
Stock XYZ is trading at $27 a share.
– Sell 27 put for $1.47
– Buy 24 put for $0.50
– The net credit received for this trade is $0.97
Width of spread : $27-$24 = $3
Profit & Loss Diagram
Best Case : The best case scenario for a put credit spread is for the underlying instrument to stay higher than strike price of the short put leg
Worst Case : The worst case scenario for put credit spread is for the underlying instrument to go lower than the strike price of the long put leg
Put Credit Spread Summary
Maximum Profit | Limited |
---|---|
Maximum Profit Scenario | Stock is at or higher than the strike price of the short put leg |
Maximum Loss | Limited : Width of spread – Initial Premium |
Maximum Loss Scenario | Stock is higher than the strike price of long call leg |
Why Trade | It caps the maximum loss It uses less buying power as compared to a naked short put |
When to Open | Stock Outlook : Bullish Volatility : High so you can get higher net credit |
When to Close | When the trade is making 50% of the max profit potential |
Legs | 2 legs |
Passage of time | Positive impact on trade With passage of time, the value of this option spread decreases |
Increase in volatility | Negative impact on trade With increase in volatility, the value of option increases |