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Bull Put Spread: Credit, Breakeven, Defined Loss, and Assignment Risk

Analyze a bull put credit spread from matched contract terms and executable net credit through expiration payoff, early assignment, settlement, margin, and account reconciliation.

Updated

For educational purposes only; not investment advice. Investing may result in loss.

Direct answer

A bull put spread, or put credit spread, sells a put at higher strike K_H and buys an equal quantity of puts at lower strike K_L, where K_H > K_L. Both legs must use the same underlying, expiration, exercise style, settlement method, multiplier and deliverable. Unequal quantities create a ratio position; different expirations or deliverables can remove the intended bound.

If the position opens for net credit C per underlying unit and width is W = K_H − K_L, expiration profit per unit before fees and taxes is C − max(K_H − S_T, 0) + max(K_L − S_T, 0). Here, S_T is the contract’s official exercise-settlement value. For 0 < C < W, maximum profit is C × multiplier × quantity, maximum contractual loss is (W − C) × multiplier × quantity, and breakeven is K_H − C.

These are matched-leg expiration results, not guarantees about interim marks, buying power or cash needs. Early assignment of an American short put can create long shares and strike funding while the long put remains open; a cash-settled European index spread instead settles only its specified net cash amount. Execution, fees, borrow, dividends, margin, broker action and taxes can change the account result.

Seven-step analysis and control process

  1. Lock the exact two series and quantities. Record underlying or index, root, put side, long or short, K_H, K_L, expiration, exercise style, settlement, multiplier, deliverable, adjustment status, currency, exchange and contract count. Verify equal quantities and every matched field rather than relying on a broker strategy label.
  2. Build one operational timeline. Normalize trade sessions, ex-dividend date, last trading time, holder exercise deadline, broker cutoff, expiration, official settlement observation and publication, assignment notice, physical or cash settlement and next tradable session to one timezone. American or European exercise and physical, cash or futures settlement are separate contract fields.
  3. Use an executable package price. Record the complex-order net bid, ask, displayed size and fees; favorable leg midpoints are not proceeds. Let the filled credit be C, calculate W = K_H − K_L, and treat C ≤ 0 or C ≥ W as a reason to recheck signs, units, quotes and deliverables rather than as free profit.
  4. Map payoff into account dollars. Evaluate S_T ≥ K_H, K_L < S_T < K_H and S_T ≤ K_L, then multiply by actual multiplier and quantity. State maximum profit, maximum contractual loss and breakeven before fees, and distinguish C ÷ (W − C) from probability, expected return, annualized return and return on actual buying power.
  5. Model each leg before expiration. Mark both legs at executable prices and evaluate delta, gamma, theta, vega, skew, rates, dividends and time. For an American short put, compare its holder’s executable sale value, intrinsic value, early receipt of strike proceeds, stock or borrow position, dividends and taxes; low extrinsic value can support early exercise but cannot predict assignment to one writer.
  6. Stress execution, assignment and margin. Test gaps, spread widening, partial fills, legging, halts, early and partial assignment, pin risk, contrary instructions, zero or full exercise, long-stock funding, possible short stock after long-put exercise, strategy or portfolio margin and broker house requirements. The long put does not automatically sell or exercise when the short put is assigned.
  7. Reconcile every close or expiration path. Confirm closing fills, assignment quantity, shares or cash settlement, long-leg disposition, premiums, strike cash, borrow, dividends, fees, taxes, tax lots and remaining positions. A roll closes one spread and opens another; it does not erase the old result.

Worked examples

  • Expiration payoff and headline reward-to-risk. One spread sells a K_H = $95 put, buys a K_L = $90 put, receives C = $1.20, and uses multiplier 100. Maximum profit is $1.20 × 100 = $120, maximum contractual loss is ($95 − $90 − $1.20) × 100 = $380, and breakeven is $95 − $1.20 = $93.80. At S_T = $100, profit is $120; at S_T = $93, it is ($1.20 − $2.00) × 100 = −$80; at S_T = $85, it is ($1.20 − $10.00 + $5.00) × 100 = −$380. The headline ratio is $120 ÷ $380 = 31.5789%, not a probability or expected return.
  • Executable combination price and fees. For the same $5.00 width, assume the displayed midpoint credit is $1.20 but the executable opening credit is $1.05. Maximum profit is $1.05 × 100 = $105, maximum contractual loss is ($5.00 − $1.05) × 100 = $395, and breakeven is $95 − $1.05 = $93.95. If the later executable buy-to-close debit is $0.30, gross realized profit is ($1.05 − $0.30) × 100 = $75. At $1 per contract for each opening and closing leg, four contract-events cost $4, leaving $75 − $4 = $71 before taxes.
  • Early assignment and preserving long-put extrinsic value. A 95/90 spread originally received $1.20 × 100 = $120. The stock is $88, the short 95 put bid is $7.20, the long 90 put bid is $2.40, and 30-day strike financing is 6.00% on a 360-day basis. Short-put intrinsic value is ($95 − $88) × 100 = $700, bid extrinsic value is ($7.20 − $7.00) × 100 = $20, and early strike-proceeds interest is $9,500 × 6.00% × 30 ÷ 360 = $47.50. A raw holder screen is $47.50 − $20 = $27.50, but it does not prove exercise or predict assignment. If assigned and prices are unchanged, selling stock and the long put gives $8,800 + $240 − $9,500 + $120 = −$340. Exercising the long put gives $9,000 − $9,500 + $120 = −$380, forfeiting $2.40 × 100 − ($90 − $88) × 100 = $40 of extrinsic value. Fees, dividends, borrow and taxes remain separate.
  • European cash-settled index spread. One European cash-settled spread has K_H = 4,000, K_L = 3,950, C = 12.50, multiplier 100, and official exercise-settlement value SET = 3,930. Expiration profit is (12.50 − max(4,000 − 3,930, 0) + max(3,950 − 3,930, 0)) × 100 = −$3,750, equal to maximum contractual loss (50 − 12.50) × 100 = $3,750; breakeven is 4,000 − 12.50 = 3,987.50. The account neither receives shares nor exchanges $400,000 or $395,000 of strike cash; a live index, ETF or futures quote cannot replace SET.

Risks and validation controls

  • Verify underlying, root, put side, strikes, expiration, style, settlement, multiplier, deliverable, adjustment status and quantity for both legs.
  • Treat unequal quantities as a ratio position whose downside loss may not be capped by the purchased puts.
  • Check OCC adjustment notices; corporate actions can change deliverables and make a standard-looking width misleading.
  • Define S_T from the exact contract; stock close, after-hours price, index, ETF and futures quotes can differ from official settlement.
  • Separate American or European exercise from physical, cash or futures settlement; neither field determines the other.
  • Evaluate short-put early exercise from the holder’s executable alternatives, strike interest, dividends, stock or borrow position and taxes.
  • Understand OCC-to-clearing-member and firm-to-customer allocation; assignment can be partial and account-specific.
  • Verify exercise-by-exception eligibility, threshold, contrary instructions and broker cutoffs; administrative processing is not advice.
  • Stress pin risk and after-hours moves; apparently in- or out-of-the-money legs can resolve asymmetrically.
  • Calculate strike funding, temporary long stock, cash settlement and next-session exposure separately from maximum contractual loss.
  • If only the long put is exercised without owned shares, plan for short-stock borrow, buy-in and dividend exposure.
  • Obtain strategy, portfolio and broker house-margin treatment; buying power can change after assignment or loss of an offset.
  • Broker liquidation is a risk control, not a promise to close the preferred leg at a favorable price.
  • Use executable complex-order bid, ask and depth; midpoint and favorable leg prices do not establish a tradable credit.
  • Model rejection, partial execution and legging; an unmatched short put has materially different downside and funding risk.
  • Plan for halts, delayed openings, stale quotes, unavailable closing trades and assignment processed before a close fill.
  • Treat Greeks as local model sensitivities; gaps, skew and volatility-surface changes can dominate smooth estimates.
  • Recalculate after any adjustment, partial close, exercise, assignment or roll rather than retaining the old label.
  • Include commissions, exchange and clearing fees, dividends, borrow and jurisdiction-specific tax treatment.
  • Reconcile fills, premiums, shares, cash, settlement, margin, collateral and tax lots after overnight files and corrections.

Common misconceptions

  • “The opening credit is earned income.” It is consideration for an unresolved short-put obligation and becomes profit or loss only through closing, exercise, assignment or expiration accounting.
  • “The stock must rise for the spread to profit.” Maximum expiration profit occurs anywhere at or above the higher short-put strike, subject to execution costs and intact legs.
  • “Defined loss means no funding, margin or assignment risk.” The expiration payoff is bounded, but temporary shares, strike cash and liquidation costs can exceed the diagram’s cash flow.
  • “The long put automatically protects an early assignment.” It remains separate until sold, exercised or expired, and exercising can destroy extrinsic value or create short shares if stock is unavailable.
  • “Positive theta, breakeven or return on maximum risk predicts success.” Gaps, gamma, volatility, skew and costs can dominate; payoff arithmetic is not probability or expected return.

Authoritative sources

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