Credit Spread

What is a credit spread?

A credit spread is an options strategy that sells one option and buys another of the same type and expiration at a different strike, collecting more premium than it pays. The net credit is the maximum profit, and the long option caps the loss at the strike width minus the credit. The two common forms are the bull put spread and the bear call spread.

Both legs match the underlying, deliverable, and quantity. A bull put spread sells the higher-strike put and buys the lower-strike put. A bear call spread sells the lower-strike call and buys the higher-strike call. The long option sets the boundary of the full expiration payoff.

How to calculate credit spread profit, loss, and breakeven

Maximum expiration profit is the opening credit. Maximum expiration loss is strike width minus credit. Multiply these per-share values by the contract multiplier and quantity.

The bull put breakeven is the short put strike minus the credit per share. The bear call breakeven is the short call strike plus the credit per share.

The example sells a 95 put for $2.20 and buys a 90 put for $0.80. One standard spread collects $140. Its maximum expiration loss is $360, and its breakeven is $93.60.

At $95 or higher at expiration, it earns the full $140 credit. At $94, it earns $40. At $92, the spread is worth $300 and the position loses $160 after the credit. At $90 and every lower expiration price, the loss is $360.

How to choose credit spread strikes and width

Use price structure, put walls, call walls, and options flow to choose the price region you want to trade. Compare complete strike pairs by credit, breakeven, maximum loss, and probability of finishing in profit.

The short strike marks the boundary of maximum profit. The breakeven marks the boundary between profit and loss. Keep those two levels distinct when evaluating the position.

Compare widths while holding the short strike and expiration fixed. Then compare alternative short strikes. Read the broker’s buying-power requirement alongside the complete dollar loss limit to choose the position size. The options profit calculator compares the collected credit, complete loss limit, profitable region, and target-date value in one view.

Credit spread P&L before expiration

Current P&L equals the entry credit minus the closing debit. A spread sold for $140 and repurchased for $60 earns $80. A $200 repurchase produces a $60 loss.

Net Greeks equal the long option’s Greeks minus the short option’s Greeks. Recalculate theta and vega across stock prices and dates to identify which leg dominates. The width, credit, and buying-power requirement are separate figures.

Credit spread vs debit spread

Debit and credit describe entry cash flow. Compare a bull put spread with a bull call spread at the same strikes and expiration using their actual entry prices and financing to evaluate the matched profit shapes.

Managing a credit spread and assignment

Use one spread order with a net credit limit. To exit, buy back the short option and sell the long option together. Removing the long option changes the position to an uncovered short.

Plan the shares produced by exercise and assignment when carrying the spread through expiration. A stock position retained after the options expire has its own exposure and P&L.

Risks and limitations of credit spreads

• Size the spread from its maximum loss. The example risks $360 to collect $140, so several full winners are needed to offset one maximum loss.
• When the spread has negative net vega, rising implied volatility raises its buyback cost and can create a mark-to-market loss. Calculate both legs’ vega; stock price relative to the short strike alone does not determine the sign.
• Close both legs before expiration when the stock sits between the strikes. An American-style short leg can be assigned early, and an expiration price between the strikes can leave the short leg assigned while the long leg expires worthless, creating a stock position.
• Enter and exit with one net limit order. Each leg pays a bid-ask spread on entry and again on exit, and those costs come out of a $140 maximum profit.

Bottom line

The 95 short strike is the line this credit spread gets paid to defend, and the 90 long put caps the loss below it. Size it from the maximum loss and the buying power it ties up, and judge the credit against the odds that $95 holds through expiration.