Understanding Put Spreads: A Complete Guide to Bull Put Strategies

If you’re exploring options trading, understanding what is a put spread is essential before deploying capital. A put spread represents one of the most structured approaches to selling options, combining defined risk with the potential for consistent premium collection.

What is a Put Spread and Why Use It?

A put spread is an options strategy that pairs two put options at different strike prices to create a trade with predetermined maximum profit and maximum loss. Also known as a “bull put spread,” this approach differs fundamentally from selling naked puts or cash-secured puts because it incorporates a protective layer through a long put option.

Here’s the core principle: you simultaneously sell a put at one strike price while buying a put at a lower strike price. This dual-leg structure is what distinguishes a put spread from simpler single-leg strategies. The long put you purchase acts as insurance, capping your downside risk and making the strategy suitable for traders with defined risk tolerances.

The primary advantage of using a put spread over naked puts is transparency. You know exactly what you stand to gain and lose before entering the trade. This predictability attracts traders seeking to systematically collect premium without the open-ended exposure of uncovered positions.

How Bull Put Spreads Work: The Trading Mechanics

To grasp the mechanics, consider a practical scenario. Stock XYZ trades at $100 per share. You execute the following transactions within a single order:

• Sell one $90 strike put, receiving $1.00 in premium
• Buy one $80 strike put, paying $0.50 in premium
• Net result: You collect $0.50 per share in credit

Your profits come almost exclusively from the sold put. Since you collected $1.00 for the short position but paid only $0.50 for the long position, the sold put loses value faster than the bought put—this differential is your profit zone.

Imagine XYZ stock rallies 5 points to $105 after you establish this position:

• The $90 put declines from $1.00 to $0.50, generating a $0.50 gain
• The $80 put falls from $0.50 to $0.25, creating a $0.25 loss
• Your net spread credit improves from $0.50 to $0.75, locking in $0.25 profit

This example illustrates why put spreads are “neutral to bullish” strategies—profit materializes whether the stock climbs or remains flat, as long as it stays above your short strike at expiration.

Real-World Example: Calculating Profit and Loss

Understanding the math behind put spreads ensures you trade with precision rather than guesswork.

Maximum Profit Calculation:

Your maximum profit equals the credit you collect upfront. In our XYZ example, that’s $0.50 per share, or $50 per contract (options contracts represent 100 shares). To capture this full profit, both options must expire worthless, which happens when XYZ closes above $90 on expiration day.

Maximum Loss Calculation:

Your maximum loss equals the width between strikes minus the credit received. Here’s the formula:

(Width of strikes) - (Net credit collected) = Max loss

For our trade: ($90 - $80) - $0.50 = $9.50 per share or $950 per contract

This worst-case scenario occurs if XYZ drops below $80 at expiration. If the stock closes between your two strikes—say $85—you experience losses on both legs. You’d be forced to purchase 100 shares at $90 while your long $80 put expires worthless, crystallizing the maximum loss.

Assignment Risk and What It Means for Traders

When you sell a put option, you accept an obligation: if that put is in-the-money at expiration, your broker will force you to buy 100 shares at the strike price. This is called assignment.

For your short $90 put in our example, assignment means purchasing 100 shares for $9,000 even if the market price is lower. However, you retain the $100 in premium you collected, reducing your effective cost basis.

Your long $80 put operates differently—it’s a right, not an obligation. You don’t face assignment risk on purchased options; instead, you have the right to sell shares at the strike price if you choose to exercise.

Understanding this distinction matters because assignment impacts your portfolio construction. Many traders assume assignment won’t occur before expiration, but rules differ across brokers and securities. Your safest approach: always prepare for the possibility that you’ll be forced to take 100 shares at your short strike.

Managing Risk and Protecting Your Capital

Selling put spreads appears attractive because it’s a high-probability trade—statistics suggest these positions expire profitably if the underlying stays above your sold strike. However, markets occasionally move violently, and capital preservation must take priority.

The Critical Capital Rule:

Never allocate more to a single put spread than you can afford to lose. If you manage a $10,000 account and sell five 10-wide spreads with a $95 max loss each, one unfavorable market event could eliminate half your account. This isn’t theoretical—it happens regularly.

Conservative position sizing requires setting aside enough buying power to accept assignment on every sold put. For our $90-strike sale, reserve $9,000. Yes, your broker might only require $1,000 in margin to establish the trade, but that margin requirement doesn’t reflect your true risk exposure. This is where inexperienced traders stumble—they see low margin requirements and conclude they can deploy excessive leverage.

Building a Risk Management Framework:

Before entering any put spread, ask yourself: What’s my plan if this stock crashes 20% in three days? Develop your response beforehand. Will you close the position early at a loss, let it ride toward expiration, or roll the short strike lower to collect additional credit? Traders lacking predetermined answers often make emotional decisions that compound losses.

Paper trading with simulated money provides an excellent sandbox to understand your actual risk tolerance. Many traders overestimate their psychological capacity to endure drawdowns. Testing your strategy with fake capital reveals your true temperament before risking real money.

As your experience deepens, you can gradually incorporate leverage and trade larger positions. However, the fundamental principle remains constant: understand your maximum risk on every trade and ensure it aligns with your capital and emotional threshold. Put spreads offer defined parameters precisely so you can trade systematically rather than recklessly. Use this advantage.