Put Credit Spread Strategy

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 ProfitLimited
Maximum Profit ScenarioStock is at or higher than the strike price of the short put leg
Maximum LossLimited : Width of spread – Initial Premium
Maximum Loss ScenarioStock is higher than the strike price of long call leg
Why TradeIt caps the maximum loss
It uses less buying power as compared to a naked short put
When to OpenStock Outlook : Bullish
Volatility : High so you can get higher net credit
When to CloseWhen the trade is making 50% of the max profit potential
Legs2 legs
Passage of timePositive impact on trade
With passage of time, the value of this option spread decreases
Increase in volatilityNegative impact on trade
With increase in volatility, the value of option increases

How to set up in ToS ?

 
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