Opening More Put Credit Spread Contracts vs. Widening Width: Which Should You Opt For?

When trading options, one of the strategies that often comes up is the Put Credit Spread.

For those new to this strategy, it involves selling a put option and simultaneously buying another put option further out of the money to limit potential losses. This strategy allows you to collect a premium while capping your downside risk.

Check out my detailed guide on what I believe is the most profitable way to trade put credit spreads.

When I first started trading put credit spreads, I found myself pondering a common question: Should I open more contracts with a narrower width or go for a wider width with fewer contracts?

Each approach has its pros and cons, and the choice largely depends on your risk appetite and trading objectives.

Let’s break down the pros and cons of each approach.

More Contracts with Narrower Width

Example: 5 contracts with a $1 width Put Credit Spread on SPY.

Pros:

1. Higher Overall Premium: By opening more contracts, you can collect a higher total premium. For example, five contracts with a $1 width may net you more in premium than a single contract with a $5 width.
2. Flexibility in Position Management: With more contracts, you have the flexibility to close some of the positions early while letting others run, which can be beneficial if the market starts moving against you.

Cons:

1. Higher Risk of Max Loss: The narrower the width, the closer the strikes are to each other, which means there’s less margin for the stock to drop before you hit max loss. In a volatile market, this can be a significant risk.
2. Increased Transaction Costs: More contracts mean more commissions and fees, which can eat into your profits, especially if you’re trading frequently.

Wider Width with Fewer Contracts

Example: 1 contract with a $5 width Put Credit Spread on SPY.

Pros:

1. Lower Risk of Max Loss: A wider spread provides a greater buffer before the stock price reaches your short strike. This means it takes a more significant drop for the position to hit max loss, making it a less risky proposition.
2. Simplicity in Management: Managing fewer contracts is often simpler, especially for newer traders. There’s less to track, and decisions become more straightforward.

Cons:

1. Lower Premium Collected: The premium collected from a wider spread with fewer contracts is generally lower than what you’d get from multiple narrower spreads. This can be a downside if your goal is to maximize income.
2. Less Flexibility: With fewer contracts, you have less flexibility in terms of position management. You can’t partially close the position to lock in some profits while leaving others open.

A Real-World Example

Let’s compare these two scenarios using the SPY ETF 3rd Sep 2024:

• Scenario 1: You open 5 contracts of a $1 width 45 DTE Put Credit Spread (Strike Price: $530 / $529), collecting a total premium of $70 ($14 per contract using mid price). 
• Scenario 2: You open 1 contract of a $5 width 45 DTE Put Credit Spread (Strike Price: $530 / $525), collecting a total premium of $63 (using mid price).

In Scenario 1, while you collect a higher overall premium, the risk of hitting max loss is significantly higher because the stock has less room to drop before the spread is fully in-the-money.

Conversely, Scenario 2 offers a lower premium, but the stock would need to drop much further before hitting max loss, making it a safer play.