Bull Put Spread

A bull put spread (also called a short put spread or credit put spread) is a defined-risk alternative to a plain cash-secured put. Instead of just selling a put and setting aside the full cash to buy 100 shares if assigned, you sell a put at one strike and also buy a further out-of-the-money put — a lower strike, same stock, same expiration. Buying that lower-strike put costs part of the premium back, so you collect a smaller net credit than a plain cash-secured put would pay, but it caps your maximum possible loss and requires far less capital than setting aside the full strike value.

The strategy makes its maximum profit (the net credit received) if the stock closes above the higher, short-put strike at expiration — both puts expire worthless and you keep the credit. It hits its maximum loss — the difference between the two strikes minus the credit received — if the stock closes below the lower, long-put strike at expiration. Because profit is capped on the upside and loss is capped on the downside, it is a "defined-risk" trade in both directions, and it is often mentioned as an option for smaller accounts, or for anyone who wants a capped, defined risk instead of taking on a full share-purchase obligation.

One risk to know: the short put can be assigned early, before expiration, if it moves deep in the money. That would require you to actually buy 100 shares before you can exercise or sell the long put to offset that purchase, so it is worth keeping enough cash or margin available even though the position's overall risk is capped.