SystemTrader
OptionsIntermediateIncome

Bull Put Spread Strategy

A credit spread combining a short put at a higher strike with a long put at a lower strike. Collect premium upfront while limiting downside risk. Profits when the underlying stays above the short strike.

Position
Short Put + Long Put
Outlook
Moderately Bullish
Max Profit
Net Credit (C)
Max Loss
K₂ - K₁ - C

Overview

The bull put spread (also called a "credit put spread" or "short put spread") is a bullish income strategy that profits when the underlying stays flat or rises. You sell a put at a higher strike and buy a put at a lower strike, both with the same expiration, collecting a net credit upfront.

This strategy is ideal when you are moderately bullish and want to generate income with defined risk. Unlike selling naked puts, the long put caps your maximum loss. Time decay works in your favor—if the stock stays above the short strike through expiration, both puts expire worthless and you keep the entire credit.

Bull put spreads are popular among income-oriented traders who want positive theta exposure with limited capital at risk. Research shows that credit spread strategies perform best when price movements are small (under 5%), making them ideal for range-bound or slowly rising markets. The strategy benefits from falling implied volatility after entry.

Key Insight

Income Generation
Collect premium upfront as net credit
Time Decay Benefit
Theta works in your favor daily
Defined Risk
Long put caps maximum loss

Bull Put Spread Payoff at Expiration

This diagram shows the profit/loss at expiration for different stock prices.You collect premium upfront and profit if the stock stays above the breakeven.

Lower Strike (K₁)
$95
Long put @ $1.5
Upper Strike (K₂)
$100
Short put @ $4
Net Credit (C)
$2.5
$4 - $1.5
Breakeven (S*)
$97.5
K₂ - C = $100 - $2.5
Max Profit: +$2.5
When stock ≥ $100 at expiration
Max Loss: -$2.5
When stock ≤ $95 at expiration
Bull put spread payoff
Profit zone
Loss zone

Research

Bull put spreads combine put selling (which harvests volatility risk premium) with defined risk through a protective long put. Research on vertical spreads and put-writing strategies provides the foundation for understanding this income-focused approach.

The Mathematics

In Plain English

The math behind this strategy is straightforward. Here's what you're actually doing:

  1. 1
    Sell 1 put option at strike K₂ (higher strike, typically ATM or slightly OTM)
  2. 2
    Buy 1 put option at strike K₁ (lower strike, further OTM), same expiration
  3. 3
    Receive a net credit (C) = Short put premium - Long put premium
  4. 4
    At expiration, if stock is above K₂: both puts expire worthless, keep entire credit
  5. 5
    At expiration, if stock is between K₁ and K₂: short put has value, profit decreases
  6. 6
    At expiration, if stock is below K₁: max loss reached, both puts exercised

That's it. The formulas below just express this process precisely.

Technical Formulas

1
Payoff at Expiration

Formula
f_T = (K_1 - S_T)^+ - (K_2 - S_T)^+ + C

Where (x)⁺ = max(x, 0). The long put payoff minus short put payoff, plus the credit received. K₁ is lower strike, K₂ is higher strike, S_T is stock price at expiration.

2
Breakeven Point

Formula
S^* = K_2 - C

Stock price where P&L equals zero. Below this price, the position loses money. The higher your credit, the lower your breakeven.

3
Maximum Profit

Formula
P_{max} = C

Maximum profit equals the net credit received. Achieved when stock closes at or above the higher strike (K₂) at expiration.

4
Maximum Loss

Formula
L_{max} = K_2 - K_1 - C

Maximum loss is the spread width minus the credit received. Occurs when stock closes at or below the lower strike (K₁) at expiration.

Credit vs Spread WidthNote

The net credit received is always less than the spread width (K₂ - K₁). A wider spread offers more premium but also more risk. A narrower spread has less premium but higher probability of profit.

Early Assignment RiskNote

The short put may be assigned early, especially if deep ITM near expiration or around ex-dividend dates. Assignment results in buying 100 shares at the strike price. The long put provides protection if this occurs.

Strategy Rules

Entry Criteria

  1. 1Underlying has neutral to bullish outlook
  2. 2Implied volatility is elevated (higher premiums)
  3. 3Support level exists below the short strike
  4. 4No major earnings or events before expiration
  5. 5Sufficient liquidity in the options chain

Strike Selection

  1. Short put: ATM or slightly OTM (higher probability)
  2. Long put: 1-2 strikes below short put
  3. Spread width based on risk tolerance
  4. Target credit of 1/3 to 1/2 of spread width
  5. Consider delta of 0.30-0.40 for short put

Exit Rules

  1. Close at 50-75% of max profit to reduce risk
  2. Close if underlying breaks below short strike
  3. Roll down and out if challenged early
  4. Let expire worthless if well OTM near expiration
  5. Close before expiration to avoid assignment risk

Risk Management

  1. 1Position size: risk no more than 2-5% of portfolio per trade
  2. 2Set mental stop if underlying drops significantly
  3. 3Avoid earnings, FDA decisions, or major announcements
  4. 4Monitor implied volatility for entry timing
  5. 5Have a plan for assignment on the short put

Implementation Guide

Implementing a bull put spread requires careful attention to strike selection, premium collection, and risk management. Follow these steps to execute the strategy properly.

1

Select Underlying and Assess Outlook

Choose a stock or ETF with a neutral to moderately bullish outlook. Look for clear support levels below the current price and avoid securities with pending binary events (earnings, FDA approvals, etc.) unless that is your explicit thesis.

Tips
  • High-liquidity underlyings have tighter bid-ask spreads
  • ETFs like SPY often have better fills than individual stocks
  • Check the earnings calendar before entering
2

Analyze Implied Volatility

Bull put spreads benefit from elevated implied volatility at entry (higher premiums) and declining IV afterward. Check if current IV is above historical averages. Avoid entering when IV is at historical lows.

Tips
  • Use IV percentile or IV rank to assess current levels
  • Entry when IV rank > 30% often provides better premium
  • Post-earnings IV crush can benefit existing positions
3

Select Strikes and Expiration

Choose the short put strike at or slightly below the current price (ATM to 1 strike OTM). Select the long put 1-3 strikes below. Expiration typically 30-45 days out balances time decay with risk.

Tips
  • Wider spreads = more premium but more risk
  • Target credit of 33-50% of spread width
  • Weekly options decay faster but have gamma risk

Avoid very narrow spreads (1-strike wide) as commissions may eat into profits significantly.

4

Enter the Trade

Enter the spread as a single order (sell-to-open the higher strike put, buy-to-open the lower strike put). Use a limit order at the mid-price or slightly below. The order should fill for a net credit.

Tips
  • Always use limit orders, never market orders
  • Start at mid-price, adjust if needed
  • Check that the credit meets your minimum threshold
5

Manage the Position

Monitor the underlying price relative to your strikes. Consider closing early at 50-75% of max profit to lock in gains and free up capital. If the underlying drops toward your short strike, decide whether to hold, roll, or close.

Tips
  • Closing at 50% profit captures most of the edge
  • Rolling down and out can rescue a challenged trade
  • Increase position monitoring in final week before expiration

Do not let short puts expire in-the-money unless you want assignment. Close or roll before expiration.

Broker Requirements

Bull put spreads require options approval level 2 or higher (spread trading). Margin requirement is typically the spread width minus the credit received. Some brokers may require higher approval levels. Ensure your account has sufficient buying power for the defined risk.

Helpful Tools & Resources

Options Chain Analysis
Thinkorswim, Tastyworks, IBKR
IV Analysis
Market Chameleon, IVolatility, Barchart
Trade Execution
Tastyworks, Thinkorswim, E*TRADE

Strategy Variations

Explore different ways to implement this strategy, each with its own trade-offs and benefits.

Wide Bull Put Spread

Use strikes 3-5 points apart for higher premium collection. Greater risk but higher potential return. Best when very confident in support levels.

Requires more capital and has larger max loss.

Narrow Bull Put Spread

Use strikes 1-2 points apart for higher probability trades. Lower premium but reduced risk. Good for conservative income generation.

Watch commissions relative to small premium collected.

Weekly Bull Put Spread

Use weekly expirations for faster time decay and more frequent trading opportunities. Higher gamma risk but premium decays rapidly.

Requires more active management and monitoring.

Iron Condor (Bull Put + Bear Call)

Combine bull put spread with bear call spread to profit from range-bound markets. Collects premium on both sides with defined risk.

Doubles the premium but adds upside risk.

Jade Lizard

Combine bull put spread with a naked short call. Eliminates upside risk if structured properly while maintaining downside defined risk.

Requires naked option approval (higher level).

Consider combining multiple variations or testing them against your specific investment goals and risk tolerance.

Risks & Limitations

High(1)
Medium(4)
Low(1)
Gap RiskHigh

Overnight gaps below both strikes can result in maximum loss before you can react. Weekend and overnight holding carries gap risk from news events.

Impact:
Limited Profit PotentialMedium

Maximum profit is capped at the net credit received. Even if the stock rallies significantly, you cannot earn more than the initial premium collected.

Impact:
Assignment RiskMedium

The short put can be assigned at any time, especially when deep in-the-money. Early assignment requires buying 100 shares at the strike price, though the long put provides protection.

Impact:
Volatility RiskMedium

Rising implied volatility increases the value of both puts, typically hurting the position since the short put gains more value than the long put. IV expansion after entry reduces profitability.

Impact:
Liquidity RiskMedium

Wide bid-ask spreads in illiquid options can significantly impact entry and exit prices, reducing actual returns below theoretical values.

Impact:
Pin Risk Near ExpirationLow

If the stock closes very near the short strike at expiration, uncertainty about assignment creates risk. The long put may have expired worthless while assignment on the short put is uncertain.

Impact:
Understanding these risks is essential for proper position sizing and portfolio construction. Consider combining with other strategies to mitigate individual risk factors.

References

  • Bondarenko, O. (2019). Historical Performance of Put-Writing Strategies. CBOE Research Publication [Link]
  • Kowalewski, O. & Śliwiński, P. (2020). The Impact of Implied Volatility Fluctuations on Vertical Spread Option Strategies. Energies, 13(20), 5323 [Link]
  • Chaput, J.S. & Ederington, L.H. (2005). Vertical Spread Design. Journal of Derivatives, 12(3), 28-46 [Link]
  • Israelov, R. & Tummala, H. (2017). Which Index Options Should You Sell?. Journal of Investment Strategies, 6(4) [Link]

Options trading involves significant risk and is not appropriate for all investors. Credit spread strategies have limited profit potential and can result in losses up to the spread width minus credit received. Early assignment risk exists for short options. Before trading options, read the Characteristics and Risks of Standardized Options document. Past performance does not guarantee future results.

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