Ready to dive into the world of options trading and potentially generate income with a defined risk profile? This comprehensive guide will walk you through the process of setting up and executing a put credit spread on Webull, a popular commission-free trading platform.
Understanding the Put Credit Spread: A Bullish to Neutral Strategy
Before we jump into the "how-to," let's briefly define what a put credit spread is. Also known as a bull put spread, this options strategy is employed when you have a moderately bullish to neutral outlook on an underlying asset (stock, ETF, etc.). You anticipate that the price of the asset will either stay flat or increase by the expiration date.
The core idea is to receive a net credit (money in your account) upfront by simultaneously:
Selling a higher strike price put option: You collect premium for taking on the obligation to buy the underlying asset at this higher strike if the price falls below it.
Buying a lower strike price put option: This acts as your protection, limiting your potential loss if the underlying asset's price drops significantly. The premium you pay for this put is less than the premium you receive from the higher strike put, resulting in a net credit.
Essentially, you are betting that the underlying asset's price will remain above your sold put's strike price at expiration. If it does, both options expire worthless, and you keep the entire net credit as profit.
Step-by-Step Guide: How to Put a Credit Spread on Webull
Step 1: Are You Ready for Options Trading? Check Your Webull Account!
Before you can even think about put credit spreads, you need to ensure your Webull account is approved for options trading.
Engage with me: Have you already enabled options trading on your Webull account? If not, no worries! We'll go through the process first.
Sub-heading: How to Enable Options Trading on Webull
Open the Webull App: Launch the Webull mobile application on your smartphone.
Navigate to "Menu": Tap on the "Menu" icon, usually located at the bottom right of the screen.
Go to "Settings": Look for and tap on "Settings" under your profile.
Manage Brokerage Account: Select "Manage Brokerage Account."
Access Options Trading: Tap on "Options Trading."
Enter Trading Password: You'll be prompted to enter your trading password for security.
Open Options Trading & Assessment: Follow the prompts to "Open Options Trading" and complete any ETO Assessment (Exchange Traded Options Assessment) if required. This assessment evaluates your knowledge of options trading and is often a series of fundamental questions. You typically have multiple attempts to pass.
Submit Application: Tick any necessary fields and tap "Submit."
Note: Your application is subject to approval by Webull, and you typically need to be at least 21 years old to enable options trading.
Step 2: Funding Your Account and Understanding Margin
While Webull offers commission-free options trading, you'll still need funds in your account to cover the margin requirements for a put credit spread.
Fund Your Account: Ensure your Webull account is sufficiently funded. You can deposit funds via ACH transfer, wire transfer, or other available methods.
Margin Requirements: A put credit spread is a defined risk strategy, meaning your maximum potential loss is capped. However, you'll still need to maintain sufficient margin in your account to cover this potential loss. Webull will typically display the margin requirement before you place the trade.
Step 3: Researching the Underlying Asset
Now that your account is ready, it's time to find a suitable underlying asset for your put credit spread.
Sub-heading: Key Considerations for Asset Selection
Outlook: Look for stocks or ETFs that you believe will remain neutral or slightly bullish in the short to medium term. Avoid highly volatile assets with significant upcoming news events (e.g., earnings reports, FDA announcements) unless you have a strong conviction and are comfortable with the increased risk.
Liquidity: Choose assets with active options chains and tight bid-ask spreads. This ensures you can enter and exit your spread efficiently without significant price slippage. High trading volume in the options chain is a good indicator of liquidity.
Technical Analysis: Utilize Webull's charting tools to identify potential support levels. A put credit spread works best when the underlying asset stays above a certain price level.
Step 4: Navigating the Options Chain on Webull
Once you've chosen an underlying asset, you'll need to access its options chain.
Search for the Asset: In the Webull app, search for the ticker symbol of your chosen stock or ETF.
Go to "Options": On the asset's detail page, tap on the "Options" tab.
Select Expiration Date: You'll see various expiration dates. For a put credit spread, consider expiration dates that align with your time horizon (e.g., 30-60 days out, or even weekly if you're an active trader). Shorter-dated options experience faster time decay (theta), which can be beneficial for credit spreads if the underlying stays stable.
Step 5: Constructing Your Put Credit Spread
This is the core of the strategy. You'll be selling one put and buying another.
Identify Strike Prices: Within the options chain, you'll see a list of strike prices for your chosen expiration date.
Selling the Higher Strike Put: Choose a higher strike price put that you believe the underlying asset's price will stay above. This put will be out-of-the-money (OTM) or at-the-money (ATM), meaning its strike price is above or at the current market price of the underlying asset. The further OTM it is, the lower the premium collected but potentially higher probability of profit.
Buying the Lower Strike Put (Protection): Select a lower strike price put that is further OTM than your sold put. This option will cost less than the premium you receive from selling the higher strike put. The difference between the strike prices determines your maximum potential loss.
Initiate a Multi-Leg Order:
On Webull, you'll typically select one of the put options first (either the one you intend to sell or buy).
Then, look for an option to "Add Leg" or select "Strategy" to build a multi-leg order.
Choose "Put Credit Spread" or "Bull Put Spread" from the strategy menu.
Enter Order Details:
Sell the Higher Strike Put: Specify the higher strike price put you want to sell.
Buy the Lower Strike Put: Specify the lower strike price put you want to buy.
Quantity: Enter the number of spreads you want to trade (e.g., "1" for one spread, which consists of selling one contract and buying one contract).
Order Type: Use a Limit Order for both legs of the spread. This allows you to specify the net credit you wish to receive for the entire spread.
Calculation: The net credit is (Premium received from sold put) - (Premium paid for bought put). Webull will usually calculate this for you in the order entry screen.
Time in Force: Choose "Day" or "Good 'Til Canceled (GTC)" based on how long you want your order to remain active.
Review and Confirm: Carefully review all the details of your order:
Underlying asset
Expiration date
Strike prices (sold and bought)
Net credit to be received
Maximum profit (equal to the net credit)
Maximum loss (difference between strikes minus net credit)
Margin requirement
Fees (Webull generally has no commission on options contracts, but regulatory fees may apply).
Place the Order: If everything looks correct, tap "Place Order."
Step 6: Monitoring and Managing Your Put Credit Spread
Placing the trade is just the beginning. Active monitoring is crucial.
Sub-heading: Key Factors to Watch
Underlying Asset Price: Keep a close eye on the price movement of the underlying asset. If it starts to approach your sold put strike, your risk increases.
Time Decay (Theta): As time passes, the value of options decays (theta decay). This is beneficial for a put credit spread, as both options lose value, but the out-of-the-money options lose value faster, contributing to your profit.
Implied Volatility (Vega): A decrease in implied volatility can also benefit a put credit spread.
Delta: This measures the sensitivity of the option's price to changes in the underlying asset's price. A put credit spread typically has a positive delta, meaning it profits when the underlying asset goes up.
Sub-heading: Exit Strategies and Adjustments
Profit Target: Many traders aim to close a put credit spread when they've realized a significant portion of the maximum profit (e.g., 50-75% of the net credit). Don't hold until expiration if you've hit your profit target, as time decay slows down in the final days, and risk can escalate quickly.
Stop Loss: Define your maximum acceptable loss before entering the trade. If the underlying asset breaches a certain price level (e.g., moves below your sold put strike and threatens your bought put), consider closing the spread to cut your losses.
Rolling the Spread: If the trade goes against you, but you still believe in your original thesis, you might consider rolling the spread. This involves buying back your current spread and simultaneously opening a new put credit spread with a later expiration date or different strike prices, often for an additional credit or to reduce your risk. This can buy you more time for the trade to work out.
Assignment Risk: While your long put protects you, there's always a theoretical risk of assignment on your short put if the stock drops significantly below it before expiration. Webull will typically handle this automatically by exercising your long put.
Step 7: Closing Your Put Credit Spread
To close your put credit spread and realize your profit or loss:
Locate Your Position: Go to your "Positions" tab on Webull.
Select the Spread: Tap on the put credit spread you wish to close.
Close Position: Look for an option like "Close Position" or "Close Spread."
Enter Order Details: Webull will automatically create an order to buy back the sold put and sell the bought put.
Use a Limit Order to specify the net debit you are willing to pay to close the spread. You want to pay less than the credit you initially received.
Review and confirm.
Place Order: Execute the order.
Related FAQ Questions (How to...)
Here are 10 common "How to" questions related to put credit spreads on Webull:
How to enable options trading on Webull?
Quick Answer: Go to Menu > Settings > Manage Brokerage Account > Options Trading in the Webull app and complete the application and assessment.
How to choose the right stock for a put credit spread?
Quick Answer: Look for stocks you expect to remain neutral to slightly bullish, with good options liquidity, and consider technical support levels.
How to calculate the maximum profit of a put credit spread?
Quick Answer: The maximum profit is the net credit received when you initially open the spread.
How to calculate the maximum loss of a put credit spread?
Quick Answer: The maximum loss is the difference between the strike prices of the two options minus the net credit received.
How to use a limit order for a put credit spread on Webull?
Quick Answer: When setting up your multi-leg order, choose "Limit" as the order type and specify the net credit you want to receive for the spread.
How to monitor the performance of my put credit spread on Webull?
Quick Answer: Regularly check the "Positions" tab in your Webull app to see the current profit/loss of your spread and the underlying asset's price.
How to close a put credit spread for profit on Webull?
Quick Answer: Go to your "Positions," select the spread, and choose "Close Position." Place a limit order to buy back the spread for a lower net debit than the credit you received.
How to roll a put credit spread if it goes against me?
Quick Answer: This is an advanced tactic. You would typically close your existing spread and simultaneously open a new put credit spread with a later expiration date and/or different strike prices.
How to avoid early assignment with a put credit spread?
Quick Answer: While not entirely avoidable, the bought put acts as protection. If the underlying asset drops significantly below your sold put, your long put will typically be exercised automatically to offset the assignment. Actively managing your position and closing it if it moves far in-the-money can also help.
How to understand Webull's options trading fees for a put credit spread?
Quick Answer: Webull typically offers commission-free options trading, but small regulatory fees and exchange fees may still apply per contract. Check the order confirmation screen for a detailed breakdown.
