Thread by @PowerTradeHQ

1/ We are in the season of UpOnly and you most likely don’t want to give up exposure to #BTC’s upside, but what if you want to use your capital efficiently and earn a kicker on your coin. ⚡️

Enter the Short Put Spread.🧵

2/ It’s a simple concept. Sell one put a little OTM, buy one put even further OTM.

I'll break it down for you. Let’s build a Put Spread step by step.

3/ First, sell an OTM put, whatever Delta you choose is up to you and your strategy. For this example, lets say #BTC is trading at 63k, I’m going to sell the 60k put. The payoff would look like the chart below👇. If #BTC expires at or above 60k we make money.

4/ Why is that? Well, remember we are collecting a premium, like an insurance company. For simplicity sake lets say we collect $4,000 for the put we sold. That premium goes straight into our pocket, but remember, we have huge risk to the downside.

5/ If #BTC were to trade down to 40k, we would have a 20k loss (the difference between price at expiry and our 60k strike.) So how do we mitigate against this loss? We simply buy a put further down the ladder.

6/ Notice the difference, our loss to the downside is now defined. Let me explain, 1 put contract represents 1 #BTC, for every dollar #BTC goes below your short put you lose a dollar, for every dollar #BTC goes below your long put you gain a dollar. They offset each other.

7/ Your loss is now limited to the difference between your strikes, we bought 56k put, which means our total risk is 4k (minus the premium we collected.)

So now what's our profit? Well, we collected a premium for the short put, but we have to pay a premium for the long put.

8/ Again for simplicity’s sake, lets say we paid $1,500 for the long put, our net premium is now $2,500 (Short put 4,000 – Long put $1,500 = $2,500). 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.

9/ Our profit wont reflect this at first, we need to collect theta as we move through the life of the contracts. You can see this illustrated with the blue line below. As long at #BTC trades above 60k that blue line will rise to eventually meet the max profit (black line.)

11/ Note: I am going to get into collecting Theta in a future thread, but for now check out the last thread we did explaining Theta.

https://twitter.com/PowerTradeHQ/status/1435975738012803084

10/ Historically this has been a nice strategy to earn yield on your #BTC, because usually NgU. This wont always be the case, you need to DYOR, but at least with this strategy you don’t lose any upside potential while capping your downside risk.

11/ Let us know what you think about selling put spreads in the comments below! We would love to hear from you.

@PowerTradeHQ