What Is a Put Credit Spread? A Complete Guide to Bull Put Spreads

A put credit spread (also called a bull put spread) is an options strategy where you sell a put option and simultaneously buy a lower-strike put option, collecting a net credit. It's one of the most popular income-generating strategies because it profits when the underlying stock stays flat or goes up—and you get paid upfront.

In this guide, I'll explain put credit spreads using a simple insurance analogy, walk through real examples with actual numbers, and show you when and why traders use this strategy. This is the foundation of my own SPY put credit spread trading strategy.

Understanding Put Credit Spreads: The Insurance Analogy

Every month you cough up a hundred bucks or so for car insurance coverage, and your insurance company makes a calculated bet that you will not get in a car accident. If you are a safe driver, the insurance company keeps your $100. But if you drive off the road while checking stock quotes on your phone, the insurance company has to pay out to fix the damage.

In other words, if you are a safe driver the insurance company profits—and if you are not, it takes a loss. The key is that the insurance company collects a small fee from you up front and is at risk for some length of time.

Selling put credit spreads works the same way. You collect a premium upfront and hope the "accident" (the stock dropping below your strike price) doesn't happen. If the stock stays above your strike, you keep the premium as profit.

How Put Credit Spreads Work: Step by Step

Let's walk through exactly how a put credit spread is constructed:

Step 1: Sell a Put Option

Say the SPY (S&P 500 index ETF) is trading at $500. You sell a put option with a strike price of $490, collecting a premium of $2.00 per share ($200 per contract, since each contract controls 100 shares). This put expires in 30 days.

By selling this put, you're agreeing to buy SPY shares at $490 if the buyer exercises their option. You're betting the SPY won't drop below $490.

Step 2: Buy a Lower-Strike Put for Protection

Selling a put alone (called a "naked put") exposes you to huge potential losses. If SPY crashes, you could lose thousands. To protect yourself, you buy a put at a lower strike price.

You buy a $485 put for $1.50 per share ($150 per contract). Now your maximum loss is capped at the difference between the strikes ($5) minus the net credit you received.

Step 3: Calculate Your Credit and Risk

• Premium received from selling $490 put: $200
• Premium paid for buying $485 put: -$150
• Net credit (your profit if SPY stays above $490): $50
• Maximum loss (if SPY drops below $485): $500 - $50 = $450

You're risking $450 to make $50. This might seem like poor odds, but the probability of SPY staying above your strike is typically high—often 70-85% depending on how far out of the money you sell.

Put Credit Spread Outcomes: What Can Happen

Best Case: Stock Stays Above Short Strike

If SPY stays above $490 at expiration, both puts expire worthless. You keep the entire $50 credit as profit. This happens most of the time with properly positioned spreads.

Worst Case: Stock Drops Below Long Strike

If SPY crashes to $475, your $490 put gets assigned (you buy shares at $490) but your $485 put allows you to sell at $485. Your loss is capped at $450 ($500 spread width minus $50 credit received).

Middle Case: Stock Between the Strikes

If SPY is at $487 at expiration, you'll be assigned on your $490 put (losing $300) but your $485 put expires worthless. Your net loss is $300 minus the $50 credit = $250. Managing trades before expiration often prevents this scenario.

Real-World Example: SPY Put Credit Spread

Let's look at an actual trade setup I might consider:

• SPY current price: $500
• Sell: SPY $490 put, 30 days to expiration, for $2.00
• Buy: SPY $485 put, 30 days to expiration, for $1.35
• Net credit: $0.65 per share ($65 per contract)
• Spread width: $5 ($500 per contract)
• Maximum risk: $500 - $65 = $435 per contract
• Return on risk: $65 / $435 = 14.9%

To lose money, SPY would need to drop more than 2% (from $500 to below $490) in 30 days. Historically, this happens less than 20-30% of the time.

Why Traders Use Put Credit Spreads

1. High Probability of Profit

By selling out-of-the-money puts (below the current price), you can create trades that win 65-80% of the time. The stock doesn't need to go up—it just needs to not crash.

2. Income Generation

Put credit spreads allow you to generate consistent income, similar to how an insurance company collects premiums. Many traders use this strategy for monthly income.

3. Defined Risk

Unlike selling naked puts, your maximum loss is always known and limited. You can never lose more than the spread width minus the credit received.

4. Time Decay Works in Your Favor

Options lose value as they approach expiration (called time decay or theta). As a seller, this works in your favor—the options you sold become worthless faster than you might expect.

Key Terms for Put Credit Spread Traders

• Credit: The money you receive when opening the trade (premium received minus premium paid)
• Short put: The put option you sell (higher strike)
• Long put: The put option you buy for protection (lower strike)
• Spread width: The difference between strike prices
• Break-even: Short strike minus credit received
• Maximum profit: The credit received
• Maximum loss: Spread width minus credit received

When to Use Put Credit Spreads

Put credit spreads work best when:

• You're bullish or neutral: You expect the stock to stay flat or go up
• Volatility is elevated: Higher volatility means higher premiums, increasing your credit
• You want income: You're looking for regular premium income rather than big directional bets
• You want defined risk: You prefer knowing your maximum loss upfront

Common Mistakes to Avoid

• Selling too close to the current price: This increases premium but dramatically increases risk of loss
• Ignoring position sizing: Never risk more than 2-5% of your account on a single trade
• Holding until expiration: Close winning trades early (at 50-75% of max profit) to reduce risk
• Trading during earnings: Stock moves during earnings can wipe out months of gains
• Not having an exit plan: Know when you'll take profits and when you'll cut losses before entering

Put Credit Spread vs. Other Strategies

Getting Started with Put Credit Spreads

If you're new to put credit spreads, here's my recommended approach:

1. Start with paper trading: Practice with fake money until you're comfortable
2. Trade liquid underlyings: Stick to SPY, QQQ, or large-cap stocks with tight bid-ask spreads
3. Sell 30-45 days to expiration: This provides the best balance of premium and time decay
4. Choose strikes with 70-80% probability of profit: Your broker's platform should show this
5. Start small: Trade 1-2 contracts until you've experienced both winning and losing trades

Next Steps

Ready to learn more about put credit spreads and income-generating options strategies?

• Baseline Strategy for Trading SPY Put Credit Spreads - My complete approach to trading put credit spreads on SPY
• What Is a Put Option? - Make sure you understand the basics first
• Iron Condor Explained - Combine put and call credit spreads for a neutral strategy
• My Trading Results - See real results from put credit spread trading

Put credit spreads are one of my favorite strategies for generating consistent income. They work well in most market conditions and provide a clear risk/reward profile. With practice and proper risk management, they can become a valuable part of your options trading toolkit.

Related Topics: Credit Spreads, Put Options, Put Credit Spread, Bull Put Spread, Options Income, Options Trading, SPY Options