Credit Put Spread

A credit put spread is a vertical spread that involves simultaneously buying and selling two puts on the same underlying with the same expiration. The long put has a strike price lower than the short put. The result is a credit, since the short put will be worth more than the long put. The maximum profit is the premium earned, and will be earned if the stock rises above the short strike. Therefore, this strategy should be used when the investor is bullish on the stock. The maximum risk is the difference in strike prices minus the earned premium. This occurs if the stock falls below the long strike. The breakeven is Short strike - premium.

Example: Revisiting the example from before, with XYZ trading for $34, our investor sells the $35 put for $1.85, and purchases the $32.50 put for $.65. This results in a credit of $120 per contract in her account. If the stock rises above $35 on expiration, she'll keep the entire principal. Her income will be reduced if the stock closes below $35. The breakeven is at $35-$1.20 = $33.80.