What is a long put spread?
Long put spreads are a type of credit spread. In this strategy, you sell one put option and buy a second put option at a lower price. This is done in the hopes that the underlying asset will increase in price before expiration. This trade is also called a put credit spread because you receive a credit when you enter it.
The closer the strike prices are to the underlying asset’s price, the more credit you will receive, but there is also a higher chance that your option will finish in-the-money. The wider the difference between the short option and the long option, the more money the person selling the option receives.
When to use a long put spread strategy
When you enter a long put spread, you believe that the price of the underlying asset will be higher than the strike price of the short put option by the time it expires. Your risk is limited to how wide the spread is minus the amount of credit received. The closer the short strike price is to the underlying asset’s price, the more credit will be received at trade entry.
How to manage a long put spread position
The break-even price for the long put spread is the short strike price minus the net credit received. The net effect of time decay is more or less neutral. Time decay will cause the option you bought to lose value, which isn't good. But it also means that the option you sold is losing value, which is good.
The effect of implied volatility depends on where the stock is relative to your strike prices. If your forecast was correct and the stock price is approaching or below the put with the lower strike value, you want implied volatility to decrease. This will make the option you sold cheaper than the one you bought, which will make the spread more valuable.
If you were wrong about the stock price and it is getting closer to or above the higher strike, then you want implied volatility to go up. This will make your out-of-the-money option increase in value faster than the near-the-money option.
Long put spread maximum profit potential
The credit you receive is the maximum amount of money you can make from the trade.
Long put spread maximum loss potential
Your potential losses are limited to the difference between what you paid for the option and the credit you received.