Understanding Put Credit Spreads: A Practical Guide to Selling Options With Defined Risk

What Actually Is a Put Credit Spread?

A put credit spread represents a directionally neutral to bullish strategy that lets you collect immediate income from selling options while capping your maximum loss upfront. Unlike naked put selling, you’re buying a lower strike put simultaneously—essentially creating a defined-risk trade where both your potential profit and potential loss are locked in before you hit execute.

Think of it as a safety net trade. You’re not hoping for a breakout move; you’re betting the stock stays where it is or goes slightly higher. The beauty? You know exactly what you can win and lose before the position ever enters your account.

How the Put Credit Spread Actually Works

Let’s use real numbers so this clicks.

The Setup: Stock XYZ trades at $100/share.

• You sell the $90 put, collecting $1.00 in premium
• You buy the $80 put, paying $0.50 in premium
• Net credit you pocket: $0.50 per share ($50 total with the 100-share multiplier)

Here’s the magic: that $90 put you sold is worth more than the $80 put you bought. Your profit comes from watching the sold put decay faster than the bought put. Both losing value is actually what you want.

Fast forward—XYZ climbs to $105:

• Your $90 short put drops from $1.00 to $0.50 (you pocket $0.50 profit)
• Your $80 long put drops from $0.50 to $0.25 (you lose $0.25)
• Net result on the spread: $0.25 profit

The wins add up because the short option bleeds faster than the long option.

Calculating Your Real Risk and Real Reward

Here’s where most traders mess up—they don’t actually know their exit before entering.

Maximum Profit = Premium Collected

In our example above, your max profit is that $0.50 per share credit—or $50 total. You hit this if XYZ stays above $90 through expiration and both puts expire worthless.

Maximum Loss = Strike Width Minus Premium Received

The width between your strikes is 10 points ($90 - $80). You collected $0.50. So your maximum loss is $9.50 per share or $950 per contract.

This worst case hits when XYZ closes below $80 at expiration. You get assigned 100 shares at $90 and are forced to sell them at $80—a $10 difference per share, minus the $0.50 credit you already pocketed.

When Assignment Happens (And What That Means)

If your short put finishes in-the-money at expiration, assignment is automatic. You don’t have a choice—your broker forces you to buy 100 shares at the strike price.

With the $90/$80 spread above: if XYZ expires at $85, you’re assigned 100 shares at $90 (since your short $90 put is ITM). You take a $5 loss per share minus the $0.50 credit = $4.50 loss per share = $450 total loss on the trade.

The long $80 put you bought? It gives you the right to sell, not an obligation. You can exercise it to dump those shares back at $80, but the damage is already done on the wider portion of the spread.

Key point: You keep the premium you collected upfront, even if assigned. That $50 credit from day one stays yours no matter what.

Risk Management: The Real Difference Between Winners and Blowers

Put credit spreads are mechanically high-probability trades—the numbers favor you if you sell them out-of-the-money and the stock behaves normally. But “high probability” doesn’t mean “no risk.”

Position sizing is everything. If you blow your entire $10,000 account on spreads, then yes, your max loss is your entire account.

The ultra-conservative approach: keep cash on hand to absorb an assignment. Our $90/$80 spread requires $9,000 in buying power if assigned. That might feel like overkill when you only “needed” $1,000 to open it, but a 15% market crash can wipe out that miscalculation fast.

As you get experience, you can layer positions and use margin more aggressively. But here’s the honest truth: if you’re debating whether you should use margin, you’re probably not ready.

Before every trade, ask yourself: What happens if this stock tanks 20%? Can I handle it without liquidating at the worst time? Do I have a plan, or will I panic sell?

Paper trading with fake money reveals your real risk tolerance better than any questionnaire. Run some scenarios where you’re wrong before you’re wrong with real money.

The Real Trade-Off

Put credit spreads win when nothing happens. The stock drifts sideways or inches higher? You keep all your premium. That’s the appeal—it’s a low-drama, consistent income play.

The flip side: when the stock moves down hard, you lose fast. Your risk-to-reward is skewed—you risk $9.50 to make $0.50. That 19-to-1 ratio is why assignment risk exists and why position sizing isn’t negotiable.

The smart money treats put credit spreads as a mechanical income generator with strict position limits, not a source of unlimited returns. Respect the structure and it works. Ignore it and it’ll teach you an expensive lesson.