Volatility Paradox

Overview

A Bull Put Spread (or Put Credit Spread) is a popular strategy for traders who want to profit from a stock going up, staying flat, or even dropping slightly.

Unlike the Bull Call Spread where you pay a debit, the Bull Put Spread is a Credit Spread. You receive money (premium) immediately when you open the trade.

[!TIP] This strategy is often called "Selling Insurance." You are taking on the risk of the stock falling, but you're buying your own "reinsurance" (the lower put) to make sure you can't lose more than a fixed amount.

The Setup

A Bull Put Spread consists of:

Short Put: Sell a put at a higher strike ( $K_H$ ). This is the leg that generates income.
Long Put: Buy a put at a lower strike ( $K_L$ ). This is the leg that defines your risk.

Mechanics: The Credit Advantage

Income Generation: You collect the net difference in premiums upfront.
Time Decay (Theta): You want time to pass. Every day the stock stays above your short strike, the options you sold lose value, which is good for you.
Probability of Profit: Because you win if the stock goes up, stays flat, or drops only a tiny bit, you usually have a higher statistical chance of winning than buying a call.

Payoff and Break-even

Max Profit

The total credit you collected at the start.

\text{Max Profit} = \text{Net Credit Received}

Max Loss

The difference between the strikes minus the credit received.

\text{Max Loss} = (K_H - K_L) - \text{Net Credit}

Break-even Point

The short strike minus the credit received.

\text{Break-even} = K_H - \text{Net Credit}

The "Credit" Greeks

1. Delta: Profitably Bullish

You have positive delta. You want the stock to rise. However, the delta is capped; once the stock is far above your strikes, your profit doesn't increase further.

2. Theta: Your Best Friend

This is a Positive Theta strategy. You are a "net seller" of time. As long as the stock remains stable, you are making money every day.

3. Vega: Short Volatility

You want the market to calm down. If implied volatility (IV) drops, the puts you sold become cheaper, allowing you to close the trade early for a profit.

When to Use?

Neutral-Bullish Outlook: You think the stock has found a "floor" and won't drop below it.
High IV Environments: Selling credit spreads is more profitable when volatility is high because you collect more premium.
Generating Consistent Income: Many traders use this on index ETFs (like SPY or QQQ) for monthly income.

Checklist for Entry

Is my Short Strike below a major support level or moving average?
Is the Credit I'm receiving at least 1/3 of the width of the strikes (a common rule of thumb)?
Am I comfortable with the Max Loss if the stock crashes?

Credit vs Debit SpreadsRead more

Mathematically, a Bull Put Spread at strikes $K_1$ and $K_2$ has the same payoff as a Bull Call Spread at the same strikes. This is due to Put-Call Parity:

C - P = S - K e^{-rt}

The main difference is the cash flow. In a Bull Put Spread, you receive the cash today and have to "defend" it. In a Bull Call Spread, you pay cash today and "wait" for a payout. Professionals often choose based on which options (calls or puts) have higher implied volatility (skew).

Bull Put Spread