Bull Put Spread: how the position works

Sell a put and buy a further out-of-the-money put beneath it. You collect a credit up front and keep all of it provided the underlying stays above the short strike; the long put exists solely to cap what happens if it does not. The payoff is the same shape as a bull call spread at the same strikes — this is the credit-financed way of expressing it.

Market view: Bullish to neutral — income
Opened for: Credit
Maximum profit: The net credit received. Kept in full at or above the short strike at expiry.
Maximum loss: (K₂ − K₁) − net credit. Reached at or below the long strike at expiry.
Breakeven: K₂ − net credit, at expiry.

How it is built

Sell 1 put at the higher strike K₂
Buy 1 put at the lower strike K₁, same expiry

All figures above are quoted per share and settle at expiry. A standard equity option covers 100 shares, so multiply by 100 for a single contract.

Before expiry: the Greeks

Net long delta and short vega, so it gains from a rising market and from falling implied volatility together. Theta is positive and is the reason the position exists: every day the underlying does not fall, the short leg loses more time value than the long one. Gamma is negative near the short strike, and that is the danger — the loss accelerates exactly where the position is most likely to end up in a bad scenario.

When to use it

When implied volatility is elevated and you believe a level will hold. Selling premium is paid for taking the other side of fear, so the structure is most attractive after a sell-off has already inflated put prices, not in a quiet market where the credit is thin and the risk unchanged.

What goes wrong

The risk/reward is deliberately lopsided. A typical spread risks several dollars to make one, so a single loss undoes many wins and position sizing matters more than the win rate.
Negative gamma near expiry. In the last week a small move through the short strike changes the position value far faster than the credit collected would suggest.
Assignment on the short put leaves you long stock at the strike, requiring the capital to hold it or an immediate exit at whatever the market opens at.

A worked example

SPY at 580. Sell the 570 put and buy the 560 put, 30 days out, for a net 2.80 credit.

Net credit received: $2.80 per share — $280 for one contract
Width of the spread: $10.00 (570 − 560)
Maximum profit: $280, at or above 570
Maximum loss: $720 ((10 − 2.80) × 100), at or below 560
Breakeven at expiry: $567.20 (570 − 2.80)

Commissions, exchange fees, financing and the bid/ask spread are excluded. On a multi-leg position the spread is usually the largest of these.

Common questions

How much margin does this require?

Brokers normally require the width of the spread less the credit received — the maximum loss — held as buying power. In the example above that is $720 per contract, and the return on that capital, not on the credit, is the honest measure of the trade.

When should I close it?

Many traders close at a set fraction of the credit, commonly half to three-quarters, rather than holding to expiry. The remaining premium is the smallest part of the reward and it is collected during the window where gamma risk is highest.

Related strategies

Educational only. This page explains how a structure behaves; it is not a recommendation to trade it. Options and futures carry substantial risk, and short and leveraged positions can lose more than the amount originally invested.