In-the-Money Put Credit Spread: How We Build It and Why

What is a put credit spread?

A put credit spread (also called a bull put spread) is two put options on the same stock with the same expiration:

• We sell a put and collect a premium.
• We buy another put with a lower strike, which is cheaper and protects us.

The difference between what we collect and what we pay is the credit. The maximum profit is that credit, and the maximum loss is the difference between the strikes minus the credit. It is a limited-risk strategy that profits if the stock goes up or, depending on how it is built, if it doesn't fall too much.

The textbook version: out-of-the-money strikes

Most explanations place both strikes below the stock price (out of the money, OTM) and wait for the price not to reach them.

Example: with a 5-point-wide spread on Amazon you collect about $120 in premium. The total risk is $500, so the maximum loss is $380. You make little relative to what you risk, although there is some room if the stock drops a bit.

The version we use at MTO: in-the-money strikes

We usually place one or both strikes above the stock price. On a put, that means they are in the money (ITM). It looks counterintuitive the first time you see it, but we have been trading this way for a long time with very good results.

Example: with Amazon at $260, a two-month spread with 295/290 strikes can collect about $400. The distance between strikes is still 5 points ($500 total risk), so the maximum loss drops to just $100.

Advantage 1: more premium and less net risk

With the same spread width, collecting more premium means risking less. In the example, the trade goes from making $120 while risking $380 to making $400 while risking $100.

Advantage 2: the trade responds sooner

We don't wait for the price to reach any strike. If Amazon rises to $270 or $280, that spread we sold for $400 may be bought back for $200 or $250: a gain of $150-$200 well before expiration.

The downside: the stock needs to go up

The OTM version can win even if the stock doesn't move or drops a little. The ITM version has less cushion: it depends on the price moving in our favor.

OTM vs. ITM at a glance

	OTM put credit spread	ITM put credit spread
Premium collected	Low	High
Maximum loss	High relative to the premium	Low
What it needs	The stock not to fall too much	The stock to go up
When it is closed	Usually held until expiration	With a small rally, before expiration
Early assignment risk	Low	Higher: you need to monitor it

Neither one is always better. They are two ways of building the same strategy, with a different balance between premium, risk and the move needed. What matters is entering with a clear plan.

A real example: PATH

With PATH trading at around $12, we sold the 14 put and bought the 13 put, both in the money. We collected a net credit of $69.90 per contract, so the maximum loss was capped at $30.10 no matter what happened.

This time the stock fell. Instead of taking the loss, we applied plan B: the MTO Wheel Spread, which ended up turning that $30 loss into a $224.72 profit.

How we choose the strikes

There is no magic formula. We test combinations until the credit justifies the risk and the strikes make sense with the chart's support, resistance and projections. The deeper in the money, the more premium and the less net risk, but the more we need the stock to go up. Liquidity also matters: enough open interest and a reasonable bid-ask spread so we can close without problems.

If you want to review the textbook version in more detail, Mario explains it in his bull put spread tutorial (in Spanish).