Bull Put Spread
A bull put spread sells a put and purchases another put at a lower strike on the same underlying. Equal quantities, matching contract sizes, and a common expiration create a vertical credit spread with finite maximum profit and loss. The higher-strike put receives more premium than the lower-strike protection costs. Below both strikes, the purchased put offsets further growth in the short obligation.
The position has a neutral-to-bullish expiration profile. It earns its full credit at or above the short strike, while the lower put limits the loss after a sufficiently large decline. That payoff protection is separate from the funds needed if assignment creates a share purchase.
Construction and example
A hypothetical example uses SPY at $750 and puts with 45 days remaining. Selling one $725 put for $6.50 per share and purchasing one $700 put for $2 produces a $4.50 per-share credit. Standard 100-share contracts make the opening receipt $450. The protective put uses part of the premium received to establish a lower sale price for shares acquired through assignment.
Expiration payoff
At $725 or above at expiration, both puts have zero payoff and the maximum profit is $450. Between $725 and $700, only the short put has intrinsic value. Each $1 decline adds $100 to its obligation, progressively using the opening credit.
The spread breaks even at $720.50, where the short put’s $4.50 per-share payoff equals the credit. At $720, its payoff is $5 per share, or $500, while the purchased put has no intrinsic value. The $450 credit leaves a $50 loss.
At and below $700, the lower put offsets further increases in the short put’s payoff. A purchase at $725 paired with a sale at $700 has a $25 per-share disadvantage before premiums. The $4.50 credit reduces that amount to a maximum loss of $20.50 per share, or $2,050 for one spread.
Moving the protective strike further below the short strike generally lowers its premium and increases the opening credit. It also enlarges the purchase-to-sale gap and usually increases the loss limit. The cheaper protection must therefore be considered together with the wider exposure it leaves between the strikes.
Value before expiration
Closing the spread buys back the $725 put and sells the $700 put. A net closing debit below the $4.50 per-share opening credit realizes a profit; a larger debit realizes a loss. Both option markets contribute to that net price.
If SPY remains above both strikes as expiration approaches, both put premiums converge toward zero and the closing cost generally falls with other inputs unchanged. A decline toward $725 increases the short put’s value before the lower put provides a comparable offset. If SPY falls below both strikes and stays there, the spread’s obligation converges toward the $25 expiration difference instead.
The net effects of time and implied volatility depend on the underlying’s position relative to both strikes. A change in downside IV can affect the two puts differently, and their sensitivities evolve as SPY moves. The strategy’s credit classification does not imply that time or lower volatility must improve its market value at every underlying price.
Exercise, assignment, and execution
SPY puts permit early exercise. Assignment of the $725 put purchases 100 shares for $72,500. While the $700 put remains open, it preserves a right to sell those shares at $700. The downside protection can therefore survive early assignment, but the account now holds shares and a put and must fund that combination.
Exercising the long put sells the shares at its strike. Selling the shares and the put separately can instead recover remaining option time value when suitable market prices are available. The purchased put requires its own transaction or exercise instruction; it is not automatically used because the higher put has been assigned.
At expiration between the strikes, assignment of the short put can leave shares while the lower put expires unused. Any shares retained afterward are exposed to further declines beyond the original option horizon. Near a strike, independent exercise instructions can also create uncertainty about the final share position.
A complex closing order can execute the option legs at a net price and maintain their one-to-one ratio for each filled package. It may leave part of the position open and does not combine the separate exercise decisions. A spread’s maximum payoff loss is therefore not a complete description of its execution or account requirements.
Payoff formulas
Let be the higher short-put strike, the lower purchased strike, the net credit per share, and the final underlying price. The result subtracts the short put payoff and adds the protective put payoff. For complete spreads with multiplier :
For positive strikes and a positive credit smaller than their width:
The break-even lies between the strikes, where the short put alone has enough intrinsic value to use the credit. The maximum loss occurs at or below the lower strike, where the payoff difference equals the width. Scaling complete spreads changes the dollar amounts without changing these boundaries.