Cameron May presents a beginner’s guide to trading credit spreads for income, focusing on a bull put spread or short put vertical. Using Apple as an example, he explains how to construct the trade, calculate maximum gain/loss and break-even, and handle expiration.
A short editorial from the FLOWNIB team on why this content matters.
A clear beginner breakdown of bull put spreads as income trades, including max profit/loss, break-even, and expiration risks.
It stands out by using real Thinkorswim order entry and expiration examples; FLOWNIB helps traders package and schedule such educational content across social channels.
New options traders should watch this, then practice with a paper account before risking capital.
An options strategy where one option is sold and another is bought, producing a net credit.
A bullish credit spread constructed by selling a higher-strike put and buying a lower-strike put.
A vertical options spread sold for a net credit, also known as a credit spread.
The upfront amount collected when entering a spread, representing the maximum potential gain.
The agreed price at which the underlying stock may be bought or sold under an options contract.
When an option seller is obligated to fulfill the contract, such as buying shares at the strike price.
For a bull put spread, the short put strike minus the net credit received.
The date on which an options contract ceases to exist and settlement occurs.
What is a credit spread?
A credit spread is an options strategy that combines a short option and a long option and generates a net credit at entry.
How does a bull put spread generate income?
You sell a higher-strike put and buy a lower-strike put. If the stock stays above the short strike, both puts expire worthless and you keep the net credit.
What is the maximum gain on a credit spread?
The maximum gain is the net credit received at entry, before commissions.
What is the maximum loss on a bull put spread?
The maximum loss is the difference between strike prices minus the net credit received.
How do you calculate break-even?
For a bull put spread, break-even is approximately the short strike minus the net credit received.
What happens if the stock expires between the two strikes?
The short put may be assigned, so you buy shares at the short strike. The long put may expire worthless, leaving you with stock risk.
Do you have to wait until expiration?
No. You can close the spread before expiration by buying back the short leg and selling the long leg, assuming the options are liquid.
What happens if both legs expire in the money?
The options are automatically exercised or assigned, and the spread settles at its maximum loss.
Is a credit spread suitable for all investors?
No. Options carry a high level of risk and are not suitable for all investors; traders should understand the strategy and risks first.
Can credit spreads be customized?
Yes. Choosing different strikes and expiration dates changes the risk, reward, and probability of success.