• Short 1 put near the money. 
• Long 1 put out-of-the-money (at a lower strike and a lower delta). 

<Bull put risk graph retrieved from OptionsPlay>

A credit put vertical is short a put and then long a put at a lower strike. 

A trader would want to use a credit put vertical if expecting any outcome other than a sharp decline in the underlying security’s price. In other words, this is more of a “not bearish” trade than a bullish trade. 

As is clear from the illustration and generally characteristic of OTM credit spreads, max gain is much smaller than max loss. But what makes up for that in the writer’s eyes (selling to open) is the higher accuracy that comes with this kind of trade. For example, a trader might use credit spreads like this if only mildly confident about direction, or if expecting small moves either way (low realized volatility).

The max loss is limited to the difference between the put strikes, minus the net premium collected upfront. Max profit is the net premium collected upfront. 

Using a credit put vertical can be a high-accuracy strategy if opening it above well established support, such as when testing a Put Wall from above for a potential bounce. 

Advanced: Dynamics and Synthetics

One tactical way to manage a credit put vertical is to close the short put for a large percentage of max profit if the underlying security moves up, which would keep the risk capped, and also allow for explosive and uncapped profits if the underlying plummets or IV (implied volatility) expands. 

As a credit vertical, like any credit spread, it would take on losses if IV increases, all else equal. This is because the short leg has more deltas, and short options are always penalized by increases in IV% if closing before expiration.

Also, this strategy should be used with strong caution on index products since almost certainly it will have a skew disadvantage, with the long put paying a higher implied volatility (IV%). 

Synthetically, a credit put vertical is logically equivalent to a debit call vertical if swapping out puts for calls the same strikes (long for a long and short for a short). To be specific, an OTM credit put vertical has the same profit and loss dynamics as an ITM debit call vertical when on the same strikes.

bullish: A trade is bullish if it would profit from an increase in the underlying (e.g. stock or future) price. Likewise, a trade thesis is bullish if it is expecting the underlying to increase.

credit: In an option strategy, there is a credit received from the time decay (theta) of short options or credit spreads. This is the premium which you receive and the counterparty pays for the opportunity to hold the position. The one receiving the credit gains income until the option expires but takes on risks which can lead to losses and be significant if from an open-ended position.

credit spread: In an option strategy, a credit spread is one that has a net credit received from short options that is greater than the cost paid on the long options. This means that there is no upfront cost of the trade (known as a debit) but there are risks (and obligations) which can lead to losses. This is also how short options work, but what a credit spread does is buy one or more options to reduce some of the risk. For any short option strategy, there is going to be obligations and assignment risk. The way assignment risk works is that short option holders can be assigned shares at any time; this risk becomes greater when an option is in-the-money and near expiration. In exchange for taking on risk, the option holder pays a premium as the counterparty. This premium gradually decays the value of the option over time as it is paid out. This time decay is measured by a first-order Greek known as theta.

defined risk: In an option strategy, if risk is defined then it is structured so that it has a max loss (capped total loss on a trade) rather than potentially unlimited loss.

ITM (in the money): An option is in-the-money if it would still have some [intrinsic] value if the option expired with the underlying price where it currently is. Being in the money is entirely about the strike price beating the underlying price. ITM options cost more than options at or out of the money; they also have less extrinsic value. Additionally, ITM options have more deltas (immediate directional risk).

IV (implied volatility): The expected percentage range over a year with 68.3% confidence. This is based on options pricing at one standard deviation. Long options benefit from increases in implied volatility and short options benefit from decreases in implied volatility. In general, when implied volatility increases it means that the expected percentage range is getting larger. When implied volatility is applied to lengths of time other than one year, then this is called the expected move.

OTM: An option is out-of-the-money if it would have zero value expiring with the underlying at its current price. When an option is out-of-the-money, its entire price is made of extrinsic value, which is a premium that option buyers are willing to pay for an opportunity to make a profit.

Put Wall: The Put Wall is our major support level, which measures the most amount of negative gamma in the market. This shows us what the bottom of the probable trading range is (the lower bound). 

RV (realized volatility): Shows the actual trading range of how much a stock is moving over a specific period. It is calculated based on historical movements, and measures the standard deviation, which means about how far it can be expected to move with a 68.3% chance. Another way to look at it is that 68.3% of historical moves would have fallen under what is measured as a standard deviation. Realized volatility can be applied to any length of time. It can also be used as a forecast of future [realized] volatility.

skew: Volatility skew is the difference between implied volatility amounts of different options strikes on the same date. Implied volatility is the expected percentage range over one year–based on option prices–with 68.3% confidence. Skew is one of the main edges to look for in an options trade, especially on vertical spreads (all options are on the same date). Sometimes it is a penalty dragging down a good trade, but it is nonetheless important to understand the extent of how much it can challenge a trade if knowingly accepting to take the opposite side of a skew advantage.

strike: The price that an option is based on. A long call will expire worthless if the price of the underlying security finishes underneath the strike price, and a long put will expire worthless if the underlying finishes above the strike price.

underlying: A reference to the immediate price of the underlying security. This is also sometimes called spot (the spot price of the underlying). The spot price is in contrast to derivatives which have option prices or [forward] futures prices.

writing: We say “write” when a trader sells an option to open a new position. Simply saying “to sell” an option is unclear, as that could mean either selling-to-close or selling-to-open a new position. The most common example of writing is the covered call strategy, which is buying 100 shares in a stock and then selling-to-open a short call on that same stock. In general, writing is to accept an obligation, and there is time-decay income in exchange for that risk (as well as the risk of assignment which is being delivered shares that can create a jump in directional risk).