Worked example — put credit spread (anonymized)

Fictional XYZ. This is ladder step 3 — after you can journal long options and (if used) covered calls without confusion.

Not financial advice

Not a recommendation. Width is chosen so max loss stays under a 2% equity cap.

Setup

• XYZ at $50
• Sell the 45 put, buy the 40 put, same monthly expiry (~30–45 DTE)
• Width \(W = 5\) → $500 per contract before credit
• Credit **\(0.80** (\)80)
• Max profit $80
• Max loss \(500 - 80 = 420\) per contract

If 2% of equity is your cap, one contract fits only if \(420 \le 0.02 \times \text{equity}\). Heat after fill must still be ≤ 12% of equity, and this name ≤ 5%.

Thesis (example)

“I do not think XYZ closes below 45 by this expiry because … Support is at … I will not hold into expiration week (21 DTE default).”

Short delta

Education material often discusses short premium in a ~15–30 delta band [verified] as a common heuristic. Pick a strike in that band only if width still respects max loss. [operator preference]

Management

Default from the operator trial: close or roll around 21 DTE. A roll is a new trade: re-check 2% / 12% / 5%.

Anti-pattern in this example

Two contracts would be $840 max loss. That is fine only if it still ≤ 2% and heat/name caps. “The credit looks nice” is not a size rule.

See also the PCS playbook and credit-spread payoffs.

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Not financial advice.