Learn trading ideas & strategies from TradeKing's experts

Upcoming Live Events
More live events...
Learn it. Trade it.

Open your TradeKing account today!

Upcoming Live Events
More live events...

Short Put Spread

AKA Bull Put Spread; Short Vertical Spread

The Setup

  • Buy a put, strike price A
  • Sell a put, strike price B
  • Generally, the stock will be above strike B

NOTE: Both options have the same expiration month.

Who Should Run It

Veterans and higher

When to Run It

You're bullish. You may also be anticipating neutral activity if strike B is out-of-the-money.

The Sweet Spot

You want the stock to be at or above strike B at expiration, so both options will expire worthless.



About the Security

Options are contracts which control underlying assets, oftentimes stock. It is possible to buy (own or long) or sell (“write” or short) an option to initiate a position. Options are traded through a broker, like TradeKing, who charges a commission when buying or selling option contracts.

Options: The Basics is a great place to start when learning about options. Before trading options carefully consider your objectives, the risks, transaction costs and fees.

The Strategy

A short put spread obligates you to buy the stock at strike price B if the option is assigned but gives you the right to sell stock at strike price A.

A short put spread is an alternative to the short put. In addition to selling a put with strike B, you’re buying the cheaper put with strike A to limit your risk if the stock goes down. But there’s a tradeoff — buying the put also reduces the net credit received when running the strategy.

Maximum Potential Profit

Potential profit is limited to the net credit you receive when you set up the strategy.

Maximum Potential Loss

Risk is limited to the difference between strike A and strike B, minus the net credit received.

Break-even at Expiration

Strike B minus the net credit received when selling the spread.

TradeKing Margin Requirements

Margin requirement is the difference between the strike prices.

NOTE: The net credit received when establishing the short put spread may be applied to the initial margin requirement.

Keep in mind this requirement is on a per-unit basis. So don’t forget to multiply by the total number of units when you’re doing the math.

As Time Goes By

For this strategy, the net effect of time decay is somewhat positive. It will erode the value of the option you sold (good) but it will also erode the value of the option you bought (bad).

Implied Volatility

After the strategy is established, the effect of implied volatility depends on where the stock is relative to your strike prices.

If your forecast was correct and the stock price is approaching or above strike B, you want implied volatility to decrease. That’s because it will decrease the value of both options, and ideally you want them to expire worthless.

If your forecast was incorrect and the stock price is approaching or below strike A, you want implied volatility to increase for two reasons. First, it will increase the value of the near-the-money option you bought faster than the in-the-money option you sold, thereby decreasing the overall value of the spread. Second, it reflects an increased probability of a price swing (which will hopefully be to the upside).

Options Guy's Tips

  • One advantage of this strategy is that you want both options to expire worthless. If that happens, you won’t have to pay any commissions to get out of your position.
  • You may wish to consider ensuring that strike B is around one standard deviation out-of-the-money at initiation. That will increase your probability of success. However, the further out-of-the-money the strike price is, the lower the net credit received will be from this spread.
  • As a general rule of thumb, you may wish to consider running this strategy approximately 30-45 days from expiration to take advantage of accelerating time decay as expiration approaches. Of course, this depends on the underlying stock and market conditions such as implied volatility.


Tools

1290 Mutual Fund screener small image
Mutual Fund Screener Pin-point the right mutual fund for your investing goals. Create customized screens based on your own search criteria.

1326 Maxit Tax Manger Image
Maxit Tax Manager Successful trading is tough enough – untangling the tax consequences of your trades shouldn’t be.

1327 Trailing stop
Trailing Stop Order This handy order type lets you “trail” your stop order for a stock, option or ETF you hold by a method you specify. Lock in potential profits and limit losses automatically.

More tools...

Related Strategies

398 Long Butterfly w/ Puts Image
Long Butterfly Spread with Puts A long put butterfly spread is a combination of a short put spread and a long put spread, with the spreads converging at strike B. Ideally, you want the puts with...

219 Fig Leaf Image
Fig Leaf This strategy acts like a covered call but uses a LEAPS call as a surrogate for owning the stock. Though the two plays are similar, managing options with two different...

403 Inverse Skip Strike Butterfly w/ Puts image
Inverse Skip Strike Butterfly with Puts You can think of this strategy as a put backspread with a twist. Instead of simply running a back spread with puts (sell one put, buy two puts), selling the extra put at...

More strategies...