Bull Put Spread

If assigned, you'll be obligated to buy 100 shares at the short put strike price. With a spread, you can immediately exercise your long put to sell at the lower strike, realizing your maximum loss. Most brokers handle this automatically, but you may need buying power temporarily. To avoid assignment, close or roll ITM positions before expiration.

A bull put spread defines your maximum loss by purchasing a protective put. Selling a naked put has substantial risk if the stock crashes (theoretically to zero). The spread reduces your credit but caps your loss at the spread width minus credit. It also requires less margin and is allowed in more account types.

Some Canadian brokers allow credit spreads in TFSAs, but rules vary significantly. Interactive Brokers and Questrade may allow them with proper approval, while others prohibit credit spreads in registered accounts. Always check with your specific broker before attempting to trade credit spreads in a TFSA.

Margin requirement is typically the spread width minus the credit received, times 100. For example, a $5 wide spread with $1.50 credit requires $350 margin per contract ($500 - $150). This is much less than the margin required for a naked short put.

Generally no. While you'd receive the full credit by holding to expiration, the risk increases dramatically in the final days due to gamma. A common practice is to close at 50% of maximum profit, capturing a good return while avoiding the elevated risk of expiration week.

Use a bull put spread when IV is elevated (above 30th percentile) to collect rich premium and benefit from theta decay. Use a bull call spread when IV is low, as you don't want to sell cheap options. Bull put spreads also work better for neutral-to-bullish views, while bull call spreads require directional movement to profit.

When the stock approaches your short strike (delta increases to -0.40 to -0.50), evaluate: 1) Is your thesis still valid? If no, close for a loss. 2) If thesis is intact, consider rolling down to lower strikes and/or out to later expiration to collect additional credit and move away from the current price. 3) Set a max loss level where you'll exit regardless.

IV crush helps your position because you have negative vega. After earnings, IV typically drops 20-50%, which reduces option values. If your spread is OTM, this accelerates your profit. However, if the stock gaps through your short strike, the IV crush won't save you from a loss.

For most traders, a short put delta between -0.25 and -0.35 provides a good balance. This translates to roughly 65-75% probability of profit. More aggressive traders might sell -0.40 delta puts for higher credit, while conservative traders prefer -0.20 delta for higher win rates but lower returns.

Return on capital = (Credit Received / Margin Required) × 100. For example, $150 credit on $350 margin = 42.8% return if you keep the full credit. Annualized returns multiply this by opportunities per year. A monthly spread earning 42% equals approximately 12% monthly return, but remember this is a maximum, not expected.

When the term structure is in backwardation (near-term IV > far-term IV), near-dated options are relatively expensive - ideal for selling. Enter bull put spreads in the elevated near-term IV. When in contango, consider longer-dated spreads or wait for a volatility spike. Monitor VIX futures curve for macro structure guidance.

Diversify across uncorrelated sectors, stagger expirations (weekly entries), and maintain total portfolio delta below target (e.g., 0.15). Monitor aggregate theta versus potential losses in a 2-sigma move. Keep cash reserve for adjustments. Use correlation analysis to avoid concentrated sector risk. Target 0.5% portfolio theta daily with max 20% of portfolio at risk.

Steep put skew means OTM puts carry extra fear premium. This benefits sellers because the short put is relatively overpriced. Analyze skew by comparing 25-delta put IV to ATM IV. When skew is steep (high ratio), favor further OTM strikes for better risk-adjusted returns. Flat skew suggests less edge in premium selling.

Vanna causes OTM put deltas to increase when IV rises. During selloffs, IV spikes and your OTM bull put spread becomes more delta-positive (more bullish exposure). This creates accelerating losses as the market drops. Counter this by: 1) sizing conservatively, 2) owning VIX calls as a hedge, or 3) exiting when IV crosses a threshold.

Optimal systematic approach: 1) Enter at IV Rank > 30% with short delta -0.25 to -0.30, 2) Target 1/3 credit of spread width, 3) Exit at 50% profit or 21 DTE (whichever first), 4) Stop loss at 2x credit, 5) Max 5% portfolio risk per trade, 6) Diversify across 5+ uncorrelated underlyings. Backtest shows this delivers 15-20% annual returns with Sharpe > 1.0 in normal markets.