A short put spread is an alternative to the short put. Ex: Sell one put slightly OTM, buy one put even further OTM.
To run a short put spread, here's how to do it:
1. Sell an OTM put.
2. Choose the Delta (up to you and your strategy) but say BTC is trading at 63k, we sell the 60k put.
3. Payoff would look like this: (If BTC expires at or above 60k we make money).
Remember we are collecting a premium, like an insurance company. For simplicity sake, let's assume we collect $4,000. This premium goes straight into our pocket. There is a big risk in doing this, if you follow the PnL line to the left you see it doesn’t stop.
If BTC were to trade down to 40k, we would essentially have a 20k loss (the difference between price at expiry and our 60k strike.) So to mitigate against this loss, we simply buy a put further down the ladder.
Our payoff would look like the graph below:
Notice the difference - our loss to the downside is now capped, one put contract represents one BTC, for every dollar BTC goes below our short put we lose a dollar, for every dollar BTC goes below our long put, we gain a dollar so they offset each other.
Our loss is now limited to the difference between our strikes, we bought 56k put, which means our total risk is $4k (minus the premium we collected). Similar to how we collected a premium for the short put, we have to pay a premium for the long put.
For simplicity’s sake, lets assume we paid $1,500 for the long put, our net premium is now $2,500 (short put 4,000 – long put $2,500 = $1,500). This is our max gain. If BTC stays above 60k when our options expire in 30 days, we will simply keep that premium and walk away.
Our profit wont reflect this at the beginning, we need to collect theta as we move through the life of the contracts. You can see illustrated with the blue line below as long at BTC trades above $60k, the blue line will rise to eventually meet the max profit (black line):
Historically this has been a nice strategy to earn yield on your BTC. This wont always be the case, you should always DYOR, but with this strategy you don’t lose any upside potential while capping your downside risk.
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