Put Credit Spread Explained (Setup, Trade Examples, & More)
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- เผยแพร่เมื่อ 11 มิ.ย. 2024
- Learn the Put Credit Spread Options Strategy with in-depth explanations, trade examples, and platform demonstrations.
✅ [Free PDFs] Put Credit Spreads + Options Trading for Beginners PDF (160+ Pages): geni.us/options-trading-pdf
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==== Chapters ====
0:00 Intro (Video PDF Download in Description)
0:47 What is the Put Credit Spread Strategy?
1:37 Max Profit & Max Loss Explained
2:32 Put Credit Spread Risk Graph
5:20 When to Enter Put Credit Spreads? (Profitable Trade Example)
10:04 Short Put vs. Put Spread Risk Comparison
11:18 Why a Spread's Maximum Value is the Width of the Strikes?
12:50 Exercise & Assignment: In-the-Money Spread at Expiration
14:15 Strike Price Selection & Risk/Reward Analysis
19:10 Put Spread Setup for Small Accounts
19:47 Closing Trades Before Expiration
21:05 Data-Driven Options Strategies
21:55 Leave Questions/Comments Below!
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===== Summary =====
In this video, we'll walk through the put credit spread options strategy. Other strategy names: the bull put spread, short put spread, or selling a put spread.
The strategy is constructed by shorting a put option and then buying another put option at a lower strike price and in the same expiration cycle.
The bull put spread has limited risk, which is the (width of the strikes - the entry credit) x 100. The strategy also has limited profit potential, which is the premium collected at entry (spread sale price x 100).
The strategy makes money so long as the stock price remains above the short put strike price, and loses money if the stock price decreases. It doesn't matter if the stock price is slightly below the spread or zero at expiration, the loss potential is the same.
Because of this, a put credit spread has significantly lower risk compared to selling naked put options. It's also a much more suitable strategy for small accounts due to the low-risk nature of selling narrow spreads (like a $1-wide spread).
In the video, I walk through numerous trade examples in IWM, and do a walkthrough of strike price selection and risk/reward analysis on tastytrade.
Watch the video all the way through to learn these key concepts quickly, and hopefully effectively with the explanations and accompanying visuals.
=======
Disclaimer: Nothing contained in our content constitutes a solicitation, recommendation, promotion, or endorsement of any particular security, other investment product, transaction, or investment. Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involve substantial risk of loss and are not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time. Past performance is not necessarily indicative of future results. I am not a financial advisor. The ideas presented in this video are for entertainment purposes only. You (and only you) are responsible for the financial decisions that you make.
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✅ [Free PDFs] Selling Puts for Monthly Income + Put Credit Spreads + Options Trading for Beginners PDF (170+ Pages): geni.us/options-trading-pdf
What did you think about this video? Leave comments/thoughts below.
-Chris
Best video I've seen on put credit spreads. To the point with great examples. I also appreciate how you explained managing the spread, i.e., what happens at expiration and how you might close the spread before expiration. Well done.
Thanks Chris. The best video in you tube explaining PUT Spread.
Wow, thank you! I appreciate that! I hope it was super helpful for you
This video was fabulous--easy to understand and thorough! Chris always has great content!
Thank you Jeremy! I appreciate it! Many more videos to come! Let me know if you have any feedback/sections that didn't make sense to you.
Great Video !!
Very informative!! I needed to hear about the different wordings for the spreads and alll about put credit spreads to gain more profit in my portfolio on Robinhood.
Hey Chris,
I like the risk to reward calculation. Thanks for putting that in there! Might have to implement that in my trading.
Thanks for the note Evan! Yeah the RR calculation is interesting and not flattering when you widen the strikes. But a super wide put spread is still better than a short naked put in my opinion.
very good presentation, easy to understand
Very informative video. Selecting strike prices is something I struggle with so I learned a lot from your risk/reward comparison of widening the spread vs trading more contracts with the narrower spread to scale up the trade.
I'm glad that was helpful!
excellent video!
Thank you Chris!
❤ from Malaysia!
You're welcome thanks for watching!
Good course.
Thanx chris..love u buddy
Always great videos, thank you.
Thanks for the comment! More videos to come!
The value in this video is off the charts, thanks!
Glad you think so! Thanks so much
Very informative
Thank you very much, your content is amazing, very well explained !
Thanks so much!
I would like to see a risk graph for the small accounts scenario, the one with just $1 dollar wide spread, also how do you create does risk graphs (not the app just the data). Really like your content keep up the good work.
very good presentation,, easy to understand
Thank you!
Thank You.
You're welcome
Credit spreads are an awesome tool. love this strategy 👍
Agreed. Thanks for the comment!
Great video, super clear. I only wish you went over finding the right time to roll your put credit spread. Can't seem to any much videos that go over it.
Nice
Chris,
Another outstanding video. Your explanation and graphics are so well done!
How do you determine profit if the stock price is between the strikes at expiration?
Thanks! You would use the following calculation:
Short Put Strike - Stock Price
With a maximum being the strike width and the minimum being zero (no negative numbers). Because a vertical spread like this can only be worth zero or the width of the strikes, or anything in-between (if the stock is in-between the strikes).
So if you sold a 200/185 put spread and the stock is at $192, the put spread is worth: $200 - $192 = $8.
If the stock is $198, the put spread is worth: $200 - $198 = $2
It's basically the intrinsic value of the short put.
But what if you are silly and you let it expire between the strike prices? Obviously you could have gotten out of the trade before the end of day...but what if you lost your internet connection at 345 on Friday?
@@projectfinance
Nvm, you answered it below and it was as I suspected.
Thanks!
Great video Chris first video I have watched I liked the fact that risk is limited w put spread but buying puts you are losing time value
Hello, when you talk about maximum loss potential on a credit spread like in the video can you elaborate what this means if the share price goes against you quickly and is ITM. Are you up for just the maximum loss money wise or do you also get assigned the shares? Thanks 🙏
Nice video. How can manage / roll this option? Is it possible to limit loses or increase profit after some time after position gets opened?
Chris. Great video and very clearly presented. What happens if you place a 5 point spread for example buy $100 sell $95 and the stock price drops to $97 on the last day. I’m forced to buy at $100 but the sell never triggers?
Your spread would be worth $3.00 if it was on the last day since the 100 put would be worth $3 and the 97 put would be worth pennies or zero if it was right at expiration. In that scenario, you would buy 100 shares of stock at $100 if assigned on the short put. Or, you could buy back the spread for $3.00 to close the trade.
In reality, if that happened on the day of expiration, you would not get assigned and you'd be able to close the spread before the close because the short 97 put would still have decent amounts of extrinsic value in the first few hours of the day.
Just to clarify this question, to be a Bull Put Spread wouldn't it be: Sell the 100 Strike and Buy the 95 Strike, otherwise it's a Debit Spread when selling the lower strike and buying the higher strike?
I really do like the way you explain things simple and to the point...In the Spread you reference at the 14 min mark (Short 190, Long 185)...what happens if the stock ends at 187 at expiration? Does that mean only short put 190 would be exercised, since it didn't shoot down to the 185? And you'd have to buy 100 shares at 190?
Yes exactly, if only one option is ITM at expiration, only that option gets exercised/assigned (depends on if you're long or short that option) and the other goes out worthless.
So yes, if you short a 190/185 put spread and the stock is 187 at expiration, the 190 short put gets assigned and you buy 100 shares at $190/share. The 185 put goes out worthless. Seeing that buying 100 shares for $190/share is a $19,000 position, you would need to close your spread before expiration if you could not carry this share position (i.e. you don't have $19K to buy the shares). If you only have $10K in your account, you could still get assigned on the short 190 put and then you'd be long stock on margin (you own $19K worth of stock in a $10K account). You'd need to be careful here and probably want to close the shares.
I always recommend closing spreads before expiration/on the day of expiration, especially if they are partially ITM or one option is close to being ITM.
Good video. To improve it for people just starting out, you should show ALL possible outcomes e.g. for the put credit spread, what happens when the price is above both strikes, below both strikes, and between the strikes (which I believe is the scenario which confuses most new traders, and is sometimes broker-dependent?)
Thank you for the feedback and that's definitely a great suggestion. I think I did that in my older version but didn't in this one for some reason!
Yeah, what happens when the trade closes between the two put strike prices? I’d like to know.
The RR is useful but doesn't take into consideration the probability of profit. If you widen the strikes you also lowers the breakeven prices and increase probability of profit. So buying multiple narrow credit spread will take more of a move in the underlying to be profitable compared to a wider credit spread. Most the time you shouldn't hold credit spread into expiration anyways so widening the spread maybe better in general. 18:48
Yes you are 100% correct. In the examples the B/E doesn’t change dramatically but still increases POP for sure. Great insight!
normally when you setup PCS, does the buy & sell of puts below the share price?
Yes, that is the normal way to do it! That way, the position makes the full profit even if the stock price doesn't move, and can even decrease a bit as long as it's above your short strike at expiration. However, the further away from the stock price you go, the less money you'll be able to make and the more risk you'll have since it's a higher probability trade.
Hi can i ask, i had a sell put itm and buy otm, what is most likely to happen if the underlying price is in betwwen on expiration? Thanks.
The short put will be assigned (you'll buy 100 shares per short put contract) and the long put expires worthless. The result is you'll end up with stock. If the stock position is too large for your account you'll need to close it or your brokerage will close it for you.
@@projectfinance so is it better to wait till expiration day to close or as long there's a profit to close? Thank you
What if the stock price at expiration is in between the puts - below the short put, but above the long put? You'd be assigned the shares I assume, which could be very expensive. What do you think is the best way to avoid that?
Exactly, you'd be assigned on the short put (buy 100 shares per short put) and the long put goes out worthless. The best way to avoid this is to always close options before expiration to avoid assignment/exercise, especially if one of the options in a spread is ITM or near being ITM.
And by before expiration I just mean before the closing bell on expiration day.
Could I do this if I had a super widespread. Let’s say I got assigned on the short side and I don’t want to exercise the long to cover. Now I am owning 100 shares that I don’t have the funds to cover, could I just sell the 100 shares and lose out on the difference while keeping the long open?
I am also thinking about this more towards a LEAPS situation, but the same scenario applies if that’s even possible to do? Thank you!
Yes exactly. If you get assigned on the short and still have the long you can just close the shares and hold the long put.
In this case means the long expiration date has to be later/further than the short expiration date?
@@projectfinance thanks so much!
Learned a lot from your videos and always recommend your channel when people ask about options on discord.
@@fongheenkitaloka2800 in the LEAPS example, yes. I have a deep ITM call with a DTE out over a year. The short calls I do are typically weekly.
@@fongheenkitaloka2800 No, for instance if you got assigned on the short put and the options had 10 days left until expiration then you could continue holding the long put for the remaining 10 days.
Is this only for margins ?
Yes you need a margin account for options strategies that include a short option.
i would just add that doing a woder spread lowers your break even point and i believe also increases the probability of success
Is now a bad time to make these types of trades with the market being so volatile?
Why choosing a put credit spread instead of a bull call debit spread? What are the differences besides one is a credit strategy and the other one is a debit strategy?
Put credit spread seems better than buying a call option on its own in my opinion.
I sold a put credit spread and the value is showing more then what I sold it for. For ex. I sold 25 contracts for .10. It is now showing a value of $300. Is it possible to make more than what I sold it for?
Can you give exact trade details? If you sold 25 spreads for $0.10, that means each spread collected $10, or $250 total. If the total value of the spreads is now $300, that means you have a $50 loss on your position currently.
@@projectfinance I took a screenshot but I don’t know how to post a pic here.
@@sonogirl12345 you could upload to Imgur and post the Imgur link here
@@projectfinance I downloaded the app but haven’t figured out how to upload a pic there.
@@sonogirl12345 I would just do it on a computer here: imgur.com/upload
why not trade weekly options ?
You can do weeklies too, just a different/faster game and need to trade strikes closer to the stock price. Easier to get blown through and see max loss on the position, but also easier to see max profits too.
can anyone answer this...what is the biggest risk to this strategy? As a new trader this seems like an easy way to make some guaranteed money?
The stock price collapses and you lose way more than you can make. It seems like the stock “won’t drop that far” but it will happen eventually if you trade the strategy enough
Please DO NOT display full screen shot of your face during your presentation. keep your picture in a very small frame in any quadrant. Let the subject you are discussing occupy the entire duration while you are talking. It is very annoying when you cut your presentation constantly with your full face. Was how Tony does it in his Option play presentation
Dont teach them...they dont deserve it
too late besides other articles show how put credit spreads work.
talking waaaaaaaaaaaaaaaaaaaay too fast, not good
How is he possibly taking too fast lol
Set 0.25x it’s not an issue with YT 😊
You’re thinking waaaaaaayyyyyyy to slow!!
Thank you for this. QQ: Which sites do you use to track and generate Put Credit Spread Risk Graph?