Put Vertical Spread Strategy

The Put Vertical Spread is a directional options strategy that involves buying and selling put options with different strike prices but the same expiration date. It’s used to express a bearish or bullish view while defining both risk and reward. This strategy is favored for its cost efficiency and limited exposure.

Structure

• Bear Put Spread: Buy higher strike put + Sell lower strike put
• Bull Put Spread: Sell higher strike put + Buy lower strike put
• Both legs share the same expiration date

Profit & Loss Profile

• Bear Put Spread: Max profit = strike difference − net premium paid
• Bull Put Spread: Max profit = net premium received
• Max Loss: Limited to net premium paid (bear) or spread width − premium received (bull)
• Breakeven: Bear = higher strike − premium paid; Bull = higher strike − premium received

Ideal Market Conditions

• Use bear put spread in moderately bearish markets
• Use bull put spread in neutral to slightly bullish markets
• Best when volatility is low for debit spreads, high for credit spreads

Example

A stock is trading at $100. You open a bear put spread:

• Buy 1 put at $105 strike for $6
• Sell 1 put at $95 strike for $2

Net debit = $4. Max profit = $6 (spread width) − $4 = $2. Breakeven = $101.

Risks & Considerations

• Profit is capped even if the stock drops sharply
• Time decay and volatility shifts can affect pricing
• Assignment risk exists for short put leg