Bull Put Spread Payoff Diagram

Direct answer: A bull put spread profits when the stock stays above the breakeven (higher strike minus net credit) at expiration, with maximum gain equal to the net credit received and maximum loss capped at the spread width minus the net credit. The payoff diagram shows flat maximum profit above the higher strike, a declining profit zone between the strikes, and flat maximum loss below the lower strike.

Construction of the Bull Put Spread

A bull put spread is built by selling one put at a higher strike price and simultaneously buying one put at a lower strike price on the same underlying and the same expiration date. The sold put (at the higher, more valuable strike) generates more premium than the bought put costs, resulting in a net credit received upfront. This credit is the maximum profit for the trade.

Example: Stock trading at $100. Sell the $100 put for $4.00; buy the $90 put for $1.50. Net credit = $4.00 minus $1.50 = $2.50 per share, or $250 per contract. The spread width is $100 minus $90 = $10. This is a $10-wide bull put spread entered for a $2.50 credit.

The bought put at the lower strike serves as insurance. If the stock falls sharply below $90, the losses from the short $100 put are offset by gains on the long $90 put, preventing the loss from growing beyond the spread width minus net credit. Without this protective leg, the position would be an uncovered short put with far greater downside exposure.

What the Payoff Diagram Shows

The bull put spread payoff diagram has three zones from right (higher stock prices) to left (lower stock prices):

Zone 1 (above higher strike): Both puts expire out of the money and worthless. The seller keeps the entire net credit. The line is flat at the maximum profit (net credit received). In the example, $250 of profit for any stock price at or above $100.

Zone 2 (between higher and lower strike): The short put is in the money and being assigned value by the market. The long put is still out of the money and worthless. Profit falls from the maximum as the stock price declines through this zone, crossing zero at the breakeven price.

Zone 3 (below lower strike): Both puts are in the money. The short put's losses are offset by the long put's gains, capping the net loss at the spread width minus the net credit. The line is flat at the maximum loss. In the example, $750 of loss for any stock price at or below $90.

Key Formulas for the Bull Put Spread

Net credit: Premium of higher-strike put minus premium of lower-strike put. Example: $4.00 minus $1.50 = $2.50.

Breakeven at expiration: Higher strike minus net credit. Example: $100 minus $2.50 = $97.50.

Maximum profit: Net credit x 100. Example: $2.50 x 100 = $250 per contract. Achieved when stock closes at or above the higher strike.

Maximum loss: (Spread width minus net credit) x 100. Example: ($10 minus $2.50) x 100 = $750 per contract. Occurs when stock closes at or below the lower strike.

Why the Bull Put Spread Is a Credit Strategy

Unlike the bull call spread (which pays a debit), the bull put spread receives premium upfront. This has important implications for how the strategy behaves. The position starts with a positive cash flow and a positive probability of maximum profit, since any stock price above the higher strike at expiration results in keeping the full credit. The trade does not require the stock to rise; it simply requires the stock to not fall below the breakeven level.

Time decay is an active ally for the bull put spread. As each day passes without the stock falling toward the lower strike, the remaining time value in the options erodes and the position moves toward its maximum gain. This makes the strategy well suited to neutral to slightly bullish environments where the stock is expected to tread water or drift modestly higher rather than making a strong directional move.

The margin requirement for a bull put spread is typically the spread width minus the net credit received. In the example, the margin held would be ($10.00 minus $2.50) x 100 = $750 per contract. This represents the maximum possible loss and defines the capital at risk for the trade, providing a clear return on risk of $250 / $750 = 33% if maximum profit is realized.

Risk and Reward Profile

The bull put spread has a risk/reward ratio that is unfavorable in absolute dollar terms (max loss exceeds max gain in most practical configurations), but the probability of profit can be favorable. Since the stock must fall below the higher strike before the trade begins losing, and must fall further below the breakeven before a net loss is realized, a well-placed bull put spread can have a 70% or higher probability of maximum profit when entered with the higher strike out of the money.

The trade-off is that the size of a loss when one occurs can be materially larger than the premium collected. A trader who consistently earns $250 per trade but loses $750 when wrong needs a win rate above 75% just to break even over time. Careful strike selection and position sizing are essential to ensure the risk/reward characteristics match the strategy's actual win rate.

Common Pitfalls

Selling bull put spreads on highly volatile or fundamentally impaired stocks: High premium is tempting, but it exists because the market prices a large move as likely. A sharp decline on a high-beta or weakening stock can breach both strikes and realize the maximum loss quickly.

Not managing the position when the stock approaches the short strike: If the stock falls toward the higher strike, the spread moves from maximum profit territory toward the loss zone. Closing the spread or rolling it to a lower strike and/or later expiration before the situation worsens is better than hoping for a recovery.

Ignoring assignment risk on the short leg: The higher-strike put can be assigned early, particularly near expiration when it is in the money. Being assigned means buying shares at the strike price. The long put provides protection, but managing the assignment itself requires attention.

FAQ

What is the maximum profit on a bull put spread?

The maximum profit on a bull put spread is the net credit received when entering the trade. If you sell a $100 put for $4.00 and buy a $90 put for $1.50, the net credit is $2.50 per share, or $250 per contract. This maximum is earned when the stock closes at or above the higher strike ($100) at expiration, causing both puts to expire worthless and allowing the seller to keep the full credit.

What is the maximum loss on a bull put spread?

The maximum loss on a bull put spread is the spread width minus the net credit received. For a $100/$90 spread with a $2.50 net credit, the spread width is $10 and the maximum loss is $10 minus $2.50 = $7.50 per share, or $750 per contract. This maximum loss occurs when the stock closes at or below the lower strike ($90) at expiration, with both puts fully in the money and the spread at its maximum negative value.

What is the breakeven for a bull put spread?

The breakeven for a bull put spread at expiration is the higher strike price minus the net credit received. For a $100/$90 spread with a $2.50 net credit: breakeven = $100 minus $2.50 = $97.50. Above $97.50, the position is profitable; below $97.50, losses begin and grow as the stock declines toward the lower strike and beyond.

How does time decay affect a bull put spread?

Time decay (theta) benefits the bull put spread seller. As time passes and the stock stays above the breakeven, the time value of both puts erodes. The sold put (which benefits the seller) decays faster than the bought put when both are out of the money, resulting in a net positive theta for the position. This is one key advantage of the credit spread: the passage of time itself works in the seller's favor even if the stock barely moves.

What is the difference between a bull put spread and a cash-secured put?

A cash-secured put sells one put and holds cash to cover potential assignment, with unlimited downside below breakeven. A bull put spread sells a higher-strike put and buys a lower-strike put, capping both the maximum profit (at the net credit) and the maximum loss (at spread width minus net credit). The bull put spread requires less capital (since the bought put limits downside), earns less premium per trade, but has strictly defined maximum risk.

When should you use a bull put spread?

A bull put spread is appropriate when you are neutral to moderately bullish and want to collect premium income with defined downside risk. It is particularly effective when implied volatility is elevated (selling premium into high vol), when you expect the stock to stay above a support level, or when you want a lower capital requirement than a cash-secured put. The trade benefits from the stock rising, staying flat, or declining only slightly above the higher strike.

References

• CBOE Options Institute: Options Pricing Education
• Options Industry Council: OCC Learning
• OCC: Options Clearing Corporation Educational Resources

Disclaimer

This article is for educational and informational purposes only. It does not constitute personalized investment, financial, or tax advice. Options trading involves significant risk, including the possible loss of the entire premium paid. All numerical examples are hypothetical and for illustration only. Consult a qualified financial professional before making trading decisions.