How I Apply The Put Credit Spread Strategy in My Trading Account

In my previous article on mastering put credit spread, I introduced a put credit spreads strategy that have a high probability of winning and are easy to manage.

Today, I’ll share how I trade put credit spreads using my portfolio so you will have a better idea how to structure it for you account.

Put Credit Spread Recap

A put credit spread is a semi-bullish options approach akin to selling a short put – you stand to gain whether the market goes up, stays flat, or experiences a slight decrease.

If you need a quick refresher, a put credit spread involves:

• Selling an out-of-the-money (OTM) put 
• buying a further OTM put. 

Presented below is the risk profile of a put credit spread.

The maximum loss for a credit spread is capped, defined by the difference in strike price between the long and short puts. This is depicted by the lower expiration line in the risk profile as seen above.

This guarantees that losses cannot exceed the spread's width minus the premium received.

By selling a put option with a strike price of $4865 and purchasing a put option with a strike price of $4815 as illustrated above, while receiving a premium of $700, you're essentially initiating a spread with a width of $50.

Since each options contract represents 100 shares, the maximum potential loss is limited to $4300 ($5000 minus the $700 premium received from selling the spread).

Capital Allocation

For my capital allocation, 30-40% of my funds will be reserved for put credit spreads.

But here's the thing, I'm not jumping in with all three at once. If the market keeps dipping, I'll spread them out, opening one at a time.

The remaining capital is reserved for other strategies.

I prefer trading put credit spreads on SPX due to abundant liquidity and zero risk of early assignment.

For instance, if I have $15k in allocated capital, I can sell up to three SPX put credit spreads, each with a $50 width, putting $5k of capital at risk per spread. 

Since the first spread has the highest risk of ending up in the money, I've opted to split it into two parts.

Instead of opening a single $50-wide put credit spread initially, I'll divide my first spread into two smaller spreads, each with a width of $25 to $30.

If the market pulls back, I can open the second part at a lower strike price, reducing my overall risk.

To compensate, I'll sell at a slightly higher delta of 0.25 for the short strike to capture a bit more premium.

As much as possible, I always aim to have at least one spread open to benefit from an upward trending market.

Parameters of Put Credit Spread

If you have not read my previous article, the gist of the strategy involves selling put credit spreads around 45 days to expiration (DTE), with the short put at 0.20 delta (except for the first spread where the short put is at 0.25 delta).

Regarding the width of the credit spread, it relies on your risk tolerance per trade and the size of your portfolio.

Personally, I opted for a spread of $50 on SPX for my current portfolio size. This creates a spread with a maximum capital at risk of $5000.

What’s truly remarkable is that this strategy scales as my portfolio expands.

I have the flexibility to either increase the quantity of $50 wide credit spreads I sell or opt for wider spreads, which entail higher risk per spread but also yield greater upfront premiums.

My Put Credit Spread Exit Strategy

As soon as I open a spread, I place a Good Till Canceled (GTC) order to close it at 50% profit.

As an illustration, let’s say I initiate a credit spread that generates a $600 upfront premium.

I’ll then immediately set a GTC order to close the spread at around 50% of the maximum premium. I like to set the price $10 lower to accommodate for fees ($290 in this case).

If the market rises or remains flat, the spread’s value should decrease by 50% or more, allowing me to lock in profit by 21 DTE or earlier.

I have recorded one of these trades on X (post here), where you can see I captured 50% of the premium in just 5 days.

If the market declines close to the short strike of my first spread, I open the second spread.

At 21 DTE, if my GTC order is not triggered, I close the position, ideally for a profit. If it’s at a loss, I accept it and move on.

By the way for the credit spread to reach the maximum loss, the market must drop significantly enough to breach the long strike of my credit spread entirely, and I must also hold onto the spread until expiry.

Since I manage my positions at 21 DTE, I usually don’t incur the maximum loss of the spread as there’s still time value remaining.

Even if my put credit spread is breached by the time there are 21 DTE, I will still exit my position and transition to opening trades with a higher probability of profit.

At this point, the market may have declined, causing the IV to increase, which allows me to open another spread with the short put further away from the current market price, increasing the probability of profit.