Put Credit Spread
A conservative options strategy (also known as a Bull Put Spread) for neutral to bullish market outlooks — collect premium upfront with defined, limited risk.
A put credit spread (also known as a bull put spread) consists of selling a put at a higher strike price and buying a put at a lower strike price — same underlying, same expiration. You receive a net credit and profit from a rising or flat stock price, or from time decay.
Key Characteristic: Established for a net credit. Both puts expire worthless if the stock stays above the short strike — you keep the full credit.
The Setup:
- Sell a put at a higher strike price (collect premium)
- Buy a put at a lower strike price (pay premium for protection)
- Net result: You receive a credit (premium collected − premium paid)
Profit Scenarios:
- Stock price rises above short put strike → Maximum profit
- Stock price stays flat or falls slightly but stays above short put → Profit from time decay
- Best case: Both options expire worthless, you keep the entire credit
Stock XYZ Trading at $100
SELL
1 Put @ $95 strike → Collect $3.00 premium
BUY
1 Put @ $90 strike → Pay $1.00 premium
Net Credit: $2.00 per share ($200 per contract)
✓ Maximum Profit: $200
When stock stays above $95 at expiration
✗ Maximum Loss: $300
($5 spread − $2 credit) × 100. When stock falls below $90
Breakeven Point:
Short strike − Net credit = $95 − $2 = $93
- Limited risk — maximum loss is capped and known upfront
- Immediate income — receive credit when opening position
- Time decay advantage — theta works in your favor
- Lower capital requirement than buying 100 shares
- High probability — can win even if stock stays flat
- Limited profit — capped at net credit received
- Loss can exceed profit — risk is often higher than reward
- Assignment risk — early assignment possible on short put
- Requires monitoring if stock drops sharply
- Gap risk — overnight gaps can cause larger losses
✓ Good Times to Use:
- Stock has pulled back and approaching support
- Bullish chart patterns forming
- High implied volatility (collect more premium)
- After sharp sell-off, expecting stabilization
✗ Avoid When:
- Strong bearish momentum or breakdown
- Negative earnings surprise expected
- Market in panic/fear mode
- Very close to expiration (gamma risk)
1. RSI — Look for readings below 30 (oversold)
- RSI 20–30: Moderately oversold — good setup
- RSI below 20: Extremely oversold — even better probability of bounce
- Divergence: Stock making new lows but RSI trending up = strong bullish signal
2. Bollinger Bands — Look for price at or below lower band
- Price at lower band: Stock may be oversold — good time to sell puts
- Best setup: Price touches lower band AND RSI is below 30
🎯 Optimal Entry: RSI 25 or lower, price at/below lower Bollinger Band, previous support nearby, high IV, 30–45 DTE
- Close position if you've captured 50–75% of maximum profit
- Set a stop loss at 2–3× the credit received
- Consider rolling down and out if stock moves against you
- Don't allocate more than 5% of portfolio to any single spread
- Avoid using the strategy right before earnings announcements
- Select strikes with 70–80% probability of expiring OTM
- Place short strike at or below strong technical support