Put spread

A put spread is created by simultaneously buying one put option and selling (writing) another put on the same underlying security, differing in strike price, expiration, or both. Pairing a long put with a short put caps the position on both ends: the premium collected on the short put offsets part of the cost of the long put, but it also limits the profit potential.

The direction of the spread depends on which put dominates. In a debit put spread (bear put spread), you buy the higher-strike put and sell a lower-strike put — a bearish position that profits if the stock falls. For example, buying a 50 put for 4 and selling a 45 put for 1 costs a net 3 (the debit); maximum gain is the 5-point difference in strikes minus the 3 paid, or 2 points, maximum loss is the 3-point debit, and breakeven is the long (higher) strike minus the net debit, or 47. In a credit put spread (bull put spread), you sell the higher-strike put and buy a lower one, collecting a net premium that you keep if the stock stays above the short strike; there, maximum gain is the net credit, maximum loss is the strike width minus that credit, and breakeven is the short (higher) strike minus the net credit. These formulas describe vertical put spreads, where both legs share the same expiration — when the legs expire on different dates (a calendar or diagonal put spread), the payoff depends on time decay and volatility between the two expirations and the strike-width arithmetic does not apply.

Traders use put spreads when they expect a moderate move and want a defined risk profile. The trade-off is symmetrical: less premium at risk than an outright long put, but a hard ceiling on profits.

Spreads are among the most heavily tested options topics on the Series 7 and Series 9 exams. Expect questions asking you to calculate maximum gain, maximum loss, and breakeven, and to name a spread as bullish or bearish, debit or credit, from its component legs.