Diagonal Bear Put Spread (Poor Man’s Covered Put)

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A Diagonal Bear Put Spread buys a longer-dated put and sells a shorter-dated put at a lower strike. When the long option is well in the money and serves as a stock substitute, this is commonly called a Poor Man’s Covered Put. It is a variation of the same diagonal structure, so both are covered in this guide.

Names and related structures: Poor Man’s Covered Put; Poor Man’s Covered Put; PMCP; long put diagonal.

Market Outlook

The trader expects a gradual decline. The long put benefits from falling prices, while selling a nearer-dated lower-strike put offsets some entry cost but gives up part of the benefit from an immediate sharp fall.

Position Construction

Example

With XYZ at $100, pay $13 for the long option and receive $2 for the short option. The net debit is $1,100. At the short expiration, suppose XYZ is $95 and the long option can be sold for $17. The short has zero intrinsic value, so closing the position earns $600. If the long instead sells for $14 at that same stock price, profit is only $300. Its remaining time value makes the difference.

All amounts use a 100-unit contract multiplier and exclude commissions and fees. These prices illustrate the arithmetic; they are not current market quotes.

Value at the First Expiration

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Maximum Profit

There is no fixed maximum dollar profit at the short expiration without assumptions about the remaining option value. Do not subtract the debit from the strike difference and treat that as the final answer for a diagonal. If the short expires and further options are sold, every new premium and close-out cost belongs in the total result; future sales are not guaranteed.

Maximum Loss

The original $1,100 debit can be lost if the short expires worthless and the long ultimately expires worthless. Under the zero-rate European model below, closing both options together at the first expiration gives a theoretical loss no greater than the debit. That bound does not cover every later sequence of assignments, stock transactions and new short sales.

Breakeven Point(s)

At the first expiration, solve long option market value minus short option intrinsic value = $11 per share. There is no fixed breakeven from the entry debit alone. Time remaining and implied volatility affect the answer, and the breakeven changes if the trader keeps or rolls either leg.

How it differs from a Covered Put

A Covered Put normally combines short shares with a short put. Here, the long put replaces the short shares, expires on a specified date and changes sensitivity as the stock moves. It does not produce the same cashflows as maintaining a short stock position.

Risks and Position Management

The short option can be assigned while the long option is still open. A short put assignment buys shares and needs cash. Selling the long option to fund a stock close-out may preserve time value that exercising it would forfeit. Verify broker treatment, particularly around dividends and expiration. Rolling adds risk and costs rather than repairing the original trade automatically.

Before expiration, option prices also reflect time remaining and volatility. The chart depends on its model assumptions. Trading costs reduce profits and increase losses. Review the contract’s exercise and settlement rules before trading.

Explore the Position

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Related Strategies

• Diagonal Spread
• Double Diagonal Spread
• Covered Put
• Advanced Options Strategies