Selling naked cash-secured puts has a problem: unlimited downside risk.
Sure, you're "backed by cash," but if the stock craters 40%, you're sitting on a massive loss. Your capital is locked up in a position that might take months to recover—if it ever does.
Put credit spreads solve this. You're still collecting premium. You're still betting the stock won't drop. But now your maximum loss is defined, known, and capped the moment you enter the trade.
The trade-off? You collect less premium. But you also risk less capital. And for many traders, that's a fair exchange—especially when you understand how to optimize spread width and expiration timing.
This guide walks through put credit spreads from structure to execution, with a focus on DTE optimization. You'll learn when spreads beat naked puts, how to select strikes for maximum probability of profit, and how to manage losing positions without blowing up your account.
What is a Put Credit Spread?
A put credit spread is a two-legged options trade:
Leg 1: Sell a put at strike A (higher strike, closer to current price)
Leg 2: Buy a put at strike B (lower strike, further from current price)
You collect net premium because you're selling a more expensive option (closer to the money) and buying a cheaper option (further out of the money).
Example:
- Stock trading at $100
- Sell $95 put for $1.50
- Buy $90 put for $0.50
- Net credit: $1.00 per spread ($100 per contract)
Your maximum profit is the credit received ($100). Your maximum loss is the width of the spread minus the credit: ($95 - $90) - $1.00 = $4.00 per spread ($400 per contract).
Why This Works
You're bullish (or neutral) on the stock. You don't think it'll drop below $95 by expiration. If you're right:
- Both puts expire worthless
- You keep the $100 credit
- Return on capital: $100 / $400 collateral = 25% return
If you're wrong and the stock drops below $90:
- You lose the full width minus credit: $400
- You know this loss upfront—no surprises
Unlike naked puts, where a stock can drop from $100 to $60 and you're sitting on a $4,000 loss (on 100 shares assigned at $100), the spread caps your loss at $400. That's the power of defined risk.
Put Credit Spread vs Cash-Secured Put: Capital Efficiency
Let's compare the two strategies side by side.
Scenario: Stock at $100. You're bullish. You want to collect premium.
Option 1: Cash-Secured Put (CSP)
- Sell $95 put for $1.50
- Capital required: $9,500 (cash to buy 100 shares at $95 if assigned)
- Max profit: $150
- Max loss: $9,350 (if stock goes to $0)
- Return on capital: 1.58%
Option 2: Put Credit Spread (PCS)
- Sell $95 put for $1.50
- Buy $90 put for $0.50
- Net credit: $1.00 ($100)
- Capital required: $400 (max loss = width - credit = $500 - $100)
- Max profit: $100
- Max loss: $400
- Return on capital: 25%
Key takeaway: The spread uses 95% less capital ($400 vs $9,500) while still collecting significant premium. Your return on capital is 16x higher, even though absolute profit is lower.
For small accounts (< $50k), spreads are game-changing. You can run 10-15 spread positions with the same capital required for 1-2 CSPs.
How to Structure a Put Credit Spread
Building a spread involves three decisions: strike selection, width, and DTE.
Step 1: Choose Your Short Strike (The Sold Put)
This is the critical strike—it determines your probability of profit.
Guidelines:
- Conservative: 0.20-0.25 delta (15-20% probability of finishing ITM)
- Moderate: 0.30-0.35 delta (30-35% probability of finishing ITM)
- Aggressive: 0.40-0.45 delta (40-45% probability of finishing ITM)
Example (stock at $100):
- Conservative: Sell $92 put (0.20 delta) = 80% chance of profit
- Moderate: Sell $95 put (0.30 delta) = 70% chance of profit
- Aggressive: Sell $97 put (0.40 delta) = 60% chance of profit
Higher delta = more premium, lower win rate. Lower delta = less premium, higher win rate.
Most traders default to 0.30 delta for balance.
Step 2: Choose Your Long Strike (The Bought Put)
This strike defines your max loss. The further away it is, the wider the spread, the more capital at risk.
Common width options:
- $5 wide: Lower capital requirement, higher ROI, but less premium collected
- $10 wide: Balanced approach (most common)
- $15+ wide: Higher premium, but more capital at risk
Rule of thumb: Keep width ≤ 10% of stock price.
Example (stock at $100):
- Narrow: Sell $95, Buy $92 ($3 wide)
- Standard: Sell $95, Buy $90 ($5 wide)
- Wide: Sell $95, Buy $85 ($10 wide)
Narrow spread:
- Collect $0.60 credit
- Risk $2.40
- Return: 25% if it works
- Higher ROI, but less absolute profit
Wide spread:
- Collect $1.50 credit
- Risk $8.50
- Return: 17.6% if it works
- More absolute profit, but lower ROI
Step 3: Choose Your DTE
This is where most traders mess up. DTE changes everything—theta decay, gamma risk, assignment probability.
We'll dive deep into DTE optimization in the next section.
DTE Optimization for Put Credit Spreads
Just like with naked puts, the number of days to expiration fundamentally changes the risk/reward of a spread.
Short DTE (7-14 Days): Fast Turnover Strategy
Why use it:
- High win rate (if you pick conservative strikes)
- Fast capital recycling (every 1-2 weeks)
- Lower theta decay on long leg (both legs decay similarly)
Setup:
- 10 DTE, sell 0.20 delta put (far OTM)
- $5 wide spread
- Collect $0.30-0.50
- Return on capital: 8-12% in 10 days
Example:
- Stock at $100
- Sell $93 put / Buy $88 put (10 DTE)
- Collect $0.40 credit ($40)
- Risk $4.60 ($460)
- Return: 8.7% in 10 days = 317% annualized (if you win every time, which you won't)
Advantages:
- Quick profits if stock stays stable
- Less calendar risk (earnings, macro events)
- Can compound capital rapidly
Disadvantages:
- Small premium per trade (need more trades to hit income goals)
- Higher gamma risk near expiration (can flip from winner to loser fast)
- More transaction costs
Best for: Traders who want to maximize capital velocity and don't mind frequent management.
Medium DTE (21-35 Days): The Sweet Spot
Why use it:
- Best balance of premium and probability
- Capture peak theta decay (last 30 days)
- Less gamma risk than short DTE
Setup:
- 30 DTE, sell 0.30 delta put
- $5-10 wide spread
- Collect $0.80-1.50
- Return on capital: 15-25% in 30 days
Example:
- Stock at $100
- Sell $95 put / Buy $90 put (30 DTE)
- Collect $1.00 credit ($100)
- Risk $4.00 ($400)
- Return: 25% in 30 days = 300% annualized
Advantages:
- Larger credit per trade (better premium/risk ratio)
- Lower management overhead (monthly rolls instead of weekly)
- Theta decay accelerates in your favor
Disadvantages:
- Capital locked up longer
- More exposure to volatility events (earnings, Fed meetings)
Best for: Most traders. Default DTE for consistent income generation.
Long DTE (45-60 Days): The Patient Approach
Why use it:
- Maximum premium collection
- Most forgiving (more time for stock to recover)
- Can combine with early exit strategy (close at 50% profit)
Setup:
- 60 DTE, sell 0.30-0.35 delta put
- $10 wide spread
- Collect $2.00-3.00
- Return on capital: 20-30% over 60 days (or close early)
Example:
- Stock at $100
- Sell $95 put / Buy $85 put (60 DTE)
- Collect $2.50 credit ($250)
- Risk $7.50 ($750)
- Return: 33% if held to expiration, or close at 50% profit ($125) in 20-30 days
Advantages:
- Big credit upfront
- Can close early for consistent gains (e.g., close at $125 profit after 3 weeks)
- Less frequent trading
Disadvantages:
- Theta decay slower initially
- More vega exposure (vulnerable to IV spikes)
- Capital locked up for 2 months unless closing early
Best for: Traders with larger accounts who want fewer trades and can afford to be patient.
DTE Recommendation
Start with 30 DTE. It's the Goldilocks zone—enough premium to justify the trade, enough time decay to work in your favor, not too much vega exposure.
As you gain experience, you can mix strategies: some 14 DTE for rapid turnover, some 45 DTE for bigger credits.
Probability of Profit by DTE
Here's how DTE affects your probability of profit for the same strike selection:
Scenario: Stock at $100, sell $95 put (0.30 delta at each DTE)
| DTE | Credit | Width | Max Loss | Breakeven | Probability of Profit (PoP) |
|---|---|---|---|---|---|
| 7 | $0.40 | $5 | $460 | $94.60 | 72% |
| 14 | $0.60 | $5 | $440 | $94.40 | 73% |
| 30 | $1.00 | $5 | $400 | $94.00 | 70% |
| 45 | $1.50 | $5 | $350 | $93.50 | 68% |
| 60 | $2.00 | $5 | $300 | $93.00 | 65% |
Key insights:
- Credit increases with DTE (more time premium), which lowers your breakeven
- But probability of profit decreases slightly (more time for stock to move against you)
- ROI is best at 30 DTE (balance of credit and risk)
The optimal formula: 21-35 DTE gives you the best risk-adjusted return. Longer than that, you're taking on unnecessary vega risk. Shorter than that, you're not capturing enough theta.
Selecting the Right Width
Width determines your ROI. Narrow spreads have higher ROI but collect less premium. Wide spreads collect more premium but have lower ROI.
Example: 30 DTE, $100 stock, sell $95 put (0.30 delta)
| Width | Long Strike | Credit | Max Loss | ROI | Absolute Profit |
|---|---|---|---|---|---|
| $3 | $92 | $0.60 | $240 | 25% | $60 |
| $5 | $90 | $1.00 | $400 | 25% | $100 |
| $10 | $85 | $1.80 | $820 | 22% | $180 |
| $15 | $80 | $2.50 | $1,250 | 20% | $250 |
Observations:
- $3-5 wide spreads have highest ROI (~25%), but collect less absolute profit
- $10+ wide spreads collect more premium, but ROI drops below 20%
- There's diminishing returns after $10 wide (you're risking way more for not much additional premium)
Recommendation:
- Small accounts (< $25k): Use $3-5 wide spreads. Maximize ROI and capital efficiency.
- Medium accounts ($25-100k): Use $5-10 wide spreads. Balance ROI and absolute profit.
- Large accounts (> $100k): Use $5-10 wide spreads (same as medium). Don't go wider—ROI deteriorates.
Never go wider than 15% of stock price. A $20 wide spread on a $100 stock is asking for trouble.
Managing Winning Spreads
You've sold a spread. The stock isn't moving much. Theta is decaying. You're profitable. Now what?
Strategy 1: Hold Until Expiration (Max Profit)
Let both legs expire worthless. Collect the full credit.
When to do this:
- Spread is safely OTM (stock is 5%+ above your short strike) with < 7 days left
- You're comfortable with assignment risk (if stock drops unexpectedly)
Pros: Maximum profit. No transaction costs to close.
Cons: Assignment risk in final days if stock dips. Gamma risk if news hits.
Strategy 2: Close at 50-70% Max Profit (Early Exit)
If you've captured 50-70% of the max profit, close the position and redeploy capital elsewhere.
Why this works:
- Last 20-30% of profit takes 50%+ of the time (diminishing returns)
- Frees up capital for new trades
- Reduces tail risk (unexpected drops near expiration)
Example:
- Sold spread for $1.00 credit ($100 profit potential)
- 15 days later, spread worth $0.35 (you've made $65 profit = 65% of max)
- Close for $65 profit, redeploy capital to new 30 DTE spread
Rule: Close at 50% profit if it happens in < 50% of the time. Close at 70% profit if it happens in < 70% of the time. Don't grind for the last 20%.
Strategy 3: Roll Up and Out (Extend the Position)
If the stock has moved higher and your spread is safely OTM, you can roll it up to a higher strike with more DTE for additional credit.
Example:
- Sold $95/$90 spread for $1.00 (30 DTE)
- 20 days later, stock now at $105. Your spread is worth $0.05 (nearly max profit).
- Close it for $0.95 profit.
- Immediately open a new $100/$95 spread (30 DTE) for $1.20 credit.
- Total credits: $1.00 + $1.20 = $2.20
Why this works: You're compounding credits instead of sitting idle. Stock has moved in your favor, so the new spread is still OTM with good probability of profit.
Managing Losing Spreads
The stock dropped. Your spread is now ITM. You're facing a loss. Here's how to handle it.
Scenario 1: Stock Slightly Below Short Strike (Small Loss)
Example: Sold $95/$90 spread. Stock now at $93.50 with 10 days left.
Your options:
Option A: Hold and hope
Stock might bounce above $95 before expiration. You'd still win. But if it doesn't, you're taking max loss.
Option B: Close early for a small loss
Spread currently worth $1.80 (you sold for $1.00, so you're down $0.80 = $80 loss). Close now, accept the $80 loss, move on.
Option C: Roll down and out
Close the $95/$90 spread (take the $80 loss). Open a new $90/$85 spread (30 DTE) for $1.20 credit. Net loss reduced to $80 - $120 = net $40 credit. You've given yourself more time and a lower strike.
Best choice: Option C (roll) if you still believe in the stock. Option B (close) if you think it'll keep dropping.
Scenario 2: Stock Below Long Strike (Max Loss Territory)
Example: Sold $95/$90 spread. Stock now at $88 with 5 days left.
Your spread is worth close to max loss ($5.00). You're down $400.
Your options:
Option A: Accept max loss
Close the position. Take the $400 hit. Move on.
Option B: Roll out for time (dangerous)
Close the spread. Open a new $90/$85 spread (30 DTE) for $1.50 credit. You've extended your loss, but now you're betting on a bounce over the next 30 days.
Caution: Rolling losing trades is how traders blow up accounts. Only roll if:
- The stock's fundamentals are still strong (no broken thesis)
- You have capital to cover further losses
- You're not just "hoping" for a recovery
Best choice: Usually Option A (accept the loss). Don't double down on losers unless you have a strong fundamental reason.
The 50% Loss Rule
If a spread is down 50% of max loss and there's < 21 DTE remaining, close it.
Don't hope for a miracle. Redeploy the remaining capital to a new trade with better odds.
Example:
- Sold $95/$90 spread for $1.00. Max loss = $4.00.
- Spread now worth $3.00 (down $2.00 = 50% of max loss).
- Don't hold. Close it, take the $200 loss, open a new spread on a better stock.
Put Credit Spreads vs Naked Puts: When to Use Each
Both strategies work. The question is: which one fits your situation?
Use Put Credit Spreads When:
-
Your account is small (< $50k)
Spreads use way less capital. You can run 10 spreads instead of 2 CSPs with the same capital. -
You want defined risk
You sleep better knowing max loss is $400, not $4,000. -
You're trading expensive stocks (> $200)
CSP on a $300 stock requires $30,000. A $10 wide spread requires $1,000. No contest. -
You want higher ROI
Spreads often deliver 20-30% ROI vs 2-5% for CSPs on the same stock. -
The stock is volatile
High IV = fat premiums on spreads. You're capturing inflated extrinsic value on both legs.
Use Cash-Secured Puts When:
-
You actually want to own the stock
If assignment is the goal (e.g., wheel strategy), CSPs are better. Spreads don't allow assignment—both legs cancel out. -
The stock pays a dividend
If you get assigned shares, you collect the dividend. Spreads don't give you shares. -
IV is low
When IV is low, spread premiums are tiny. CSPs collect more absolute premium in low-IV environments. -
Your account is large (> $100k)
Capital efficiency matters less when you have excess capital. CSPs are simpler—one leg, less management. -
You're trading cheap stocks (< $50)
A $5 wide spread on a $30 stock is 16% of the stock price—too wide. CSPs make more sense for cheap stocks.
Hybrid Approach: Mix Both
Run CSPs on stocks you want to own. Run spreads on stocks you just want to collect premium on.
Example portfolio:
- CSP on AAPL (you'd own it at $160): $16,000 capital
- CSP on MSFT (you'd own it at $330): $33,000 capital
- Spread on NVDA (too expensive to own): $800 capital
- Spread on TSLA (too volatile to own outright): $600 capital
This diversifies your strategy and capital allocation.
Real-World Example: 3-Month Spread Campaign
Let's walk through a 3-month strategy running put credit spreads.
Starting capital: $10,000
Strategy: Sell $5 wide spreads at 30 DTE, 0.30 delta, close at 50% profit or 21 DTE
Month 1
Week 1: Open 5 spreads ($400 risk each = $2,000 total capital)
- Position 1: SPY $440/$435 for $1.00 credit
- Position 2: AAPL $160/$155 for $1.20 credit
- Position 3: MSFT $330/$325 for $1.10 credit
- Position 4: AMD $120/$115 for $1.30 credit
- Position 5: NVDA $440/$435 for $1.50 credit
Total credits collected: $6.10 per spread × 5 = $610
Week 3: SPY spread hit 50% profit. Close for $0.50 ($50 profit).
Week 3: Open new SPY spread $445/$440 for $1.00 credit.
Week 4: AAPL spread hit 50% profit. Close for $0.60 ($60 profit).
Week 4: Open new AAPL spread $165/$160 for $1.25 credit.
End of Month 1:
- Closed 2 spreads early: +$110 profit
- 5 spreads still open (3 original + 2 new)
Month 2
Week 5: AMD spread expires worthless. +$130 profit (full credit).
Week 5: Open new AMD spread $125/$120 for $1.40 credit.
Week 6: MSFT spread down $0.50 (stock dropped). Roll down and out to $325/$320 for $1.00 credit. Net: -$50 loss + $100 credit = +$50.
Week 7: NVDA spread hit 50% profit. Close for $0.75 ($75 profit).
Week 7: Open new NVDA spread $450/$445 for $1.60 credit.
End of Month 2:
- Total profits so far: $110 + $130 + $75 = $315
- 1 roll (MSFT): +$50 net
- Running total: $365
Month 3
Week 9: All 5 spreads closed or expired profitable.
- SPY: +$100 (full credit)
- AAPL: +$62 (50% profit)
- MSFT: +$50 (net after roll)
- AMD: +$70 (50% profit)
- NVDA: +$80 (50% profit)
End of Month 3:
- Total profit: $365 + $362 = $727 on $2,000 capital deployed = 36% return in 3 months
Annualized: ~144% return (if maintained over 12 months).
Win rate: 9 winners out of 10 spreads = 90% win rate.
Common Put Credit Spread Mistakes
Mistake 1: Going Too Wide (> 10% of Stock Price)
A $15 wide spread on a $100 stock = 15% of stock price. If the stock drops 12%, you're near max loss. Too much risk.
Fix: Keep spreads ≤ 10% of stock price. Usually $5-10 wide.
Mistake 2: Selling Spreads in Low IV Environments
IV percentile = 20%. You sell a spread and collect $0.40 on a $5 wide spread (8% ROI). Not worth it.
Fix: Only sell spreads when IV percentile > 50%. Wait for volatility.
Mistake 3: Holding Losing Spreads Too Long
Your spread is down 75% of max loss. You "hope" the stock bounces. It doesn't. You take max loss.
Fix: Use the 50% loss rule. Cut losses before they become max losses.
Mistake 4: Not Taking Profits Early
Your spread hit 60% max profit in 10 days. You hold for the last 40% and tie up capital for another 20 days. Opportunity cost.
Fix: Close at 50-70% profit and redeploy capital to new spreads.
Mistake 5: Selling Spreads Into Earnings
Stock has earnings in 5 days. You sell a spread anyway. Stock gaps down 10% post-earnings. Max loss.
Fix: Avoid spreads that expire within 7 days of earnings unless you want binary outcomes.
Advanced: Iron Condors (Combining Put and Call Spreads)
Once you master put credit spreads, the natural evolution is the iron condor—selling both a put credit spread and a call credit spread on the same stock.
Structure:
- Sell $95/$90 put spread (collect credit)
- Sell $105/$110 call spread (collect credit)
- Stock at $100
Total credit: $1.00 (put spread) + $1.00 (call spread) = $2.00
Max loss: $5 (width) - $2 (credit) = $3 per side = $300 risk per iron condor
Why this works: You're betting the stock stays range-bound (between $95 and $105). You collect premium on both sides.
When to use: Low volatility, range-bound markets. Stock has been trading in a tight range for weeks.
Risk: If stock breaks out in either direction, one side loses. But the other side is profitable, partially offsetting the loss.
Final Thoughts: Spreads as Capital Multipliers
Put credit spreads aren't better than cash-secured puts—they're different. CSPs are for traders who want to own stock. Spreads are for traders who want capital efficiency.
For small accounts, spreads are essential. They let you run 10x more positions with the same capital, diversifying risk and compounding gains faster.
Key principles:
- Sell 30 DTE as default (best theta-to-risk ratio)
- Use $5-10 wide spreads (balance ROI and absolute profit)
- Sell 0.30 delta strikes (70% probability of profit)
- Close at 50-70% max profit (don't grind for the last 20%)
- Cut losses at 50% of max loss (don't hope for miracles)
Start with 3-5 spreads. Run them for 3 months. Track your win rate, ROI, and max drawdown. Adjust from there.
This is how you turn $10,000 into $15,000 in a year without taking on unlimited risk. That's the power of defined-risk income strategies. That's put credit spreads working as designed.
To understand the Greek mechanics behind spreads, read our options Greeks guide. For comparison with unlimited-risk strategies, see our cash-secured puts playbook. To learn the bearish counterpart, explore call credit spreads. And to combine both into neutral strategies, check out iron condors.
Related Articles
- Options Greeks Explained: Income Trader's Guide - Understand theta, delta, and gamma in spreads
- Cash-Secured Puts Playbook: DTE Optimization & Assignment Risk - Compare spreads vs naked puts
- Call Credit Spreads: Bearish Income with Defined Risk - Learn the bearish counterpart
- Iron Condor Strategy: Profit from Range-Bound Markets - Combine put and call spreads