Bull Put Spread

Core Thesis

A Bull Put Spread is a defined-risk income structure that profits if price stays above a chosen floor. It monetizes elevated downside fear while limiting disaster risk with a long put wing.

Structure

• Short put at higher strike $K_s$.
• Long put at lower strike $K_l$.
• Same expiration; net credit $C$.

Expiration Payoff Mathematics

$$\Pi_T = C - \max(K_s-S_T,0) + \max(K_l-S_T,0)$$

• Max profit: $C$.
• Max loss: $(K_s-K_l)-C$.
• Break-even: $K_s - C$.

Greek Profile

• Positive theta and positive delta at entry.
• Negative gamma and short vega are the core risks in fast selloffs.
• Risk accelerates as spot approaches short strike near expiration.

Strike and Tenor Design

• Common implementation: 20-45 DTE with short-put delta ~0.15-0.30.
• Wing width chosen from risk budget first, then credit target.
• Prefer entry in above-average IV regimes where premium compensates tail risk.

Management Framework

• Many desks close around 50-75% credit capture.
• If challenged, decide early: defend (roll/out) or de-risk (close/reduce).
• Avoid passive expiry hold when spot is near short strike (pin/assignment risk).

Failure Modes

• Oversizing because win rate appears high.
• Selling credit in low-IV regimes with poor risk/reward.
• Rolling repeatedly without acknowledging thesis deterioration.

Practical Checklist

• Is break-even below your invalidation level?
• Is max loss per spread consistent with portfolio drawdown limits?
• Is premium adequate for event and gap risks in that cycle?