12. Short Put Spread

  • Vertical credit spread
  • It is like selling a put but protecting yourself at the downside
  • Sell a put at KS and buy a put at a lower strike price KL
  • It has to be at same expiration and same number of contracts
  • This is a bullish position (selling a put with protection)
  • The max profit that you can have is the initial credit (minus the premium of the long put)
  • This is a bullish position

Advantages

  • Clear max profit and clear max loss
  • Positive time decay
  • Notice how the long position is more OTM than the short position, the opposite to a Long Put Spread

shirt_put_spread.png

At expiration, if it expires

  • OTM: Worthless (max profit)
  • ATM: Assigned on the short call
  • ITM: Excersiced and assigned (max loss)

Example

  • 1505/1500 short put spread initiated for a credit of 2
  • Max loss is 3 (strike spread minus credit)
  • Max profit is 2
  • Breakeven is at 1502
    short_put_spread.png
    Capital required
  • Long 100 shares - $160,000
  • Sell 1 1505 put - $30,000
  • Buy 1505/1500 call spread - $300
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Table Of Contents
12. Short Put Spread
Advantages
Example