A credit spread sells one option and buys a further out-of-the-money option of the same type and expiry, collecting a net premium up front. A bull put spread profits if the stock stays above the short put, a bear call spread profits if it stays below the short call, and both cap the loss at the distance between the strikes minus the credit.
How it works
The short option generates the income; the long option, cheaper because it is further from the price, limits the risk. Values below are per share; one contract covers 100 shares.
| Measure | Bull put spread | Bear call spread |
|---|---|---|
| Legs | Sell put at higher strike K1, buy put at lower strike K2 | Sell call at lower strike K1, buy call at higher strike K2 |
| Max profit | Net credit | Net credit |
| Max loss | (K1 − K2) − net credit | (K2 − K1) − net credit |
| Breakeven | K1 − net credit | K1 + net credit |
| View | Stock holds above a level | Stock stays below a level |
Both spreads gain from time passing and from falling implied volatility. Unlike buying a call or put, they can profit if the stock moves sideways or even slightly against you, as long as it stays on the right side of the breakeven at expiry. Combining a bull put spread and a bear call spread on the same expiry creates an iron condor.
How to read it
- Short strike placement. A short strike's delta is a rough guide to the chance it finishes in the money; a common rule of thumb puts the chance of the price touching it before expiry at about twice that delta.
- Levels. A bull put spread with its short strike below established support, or a bear call spread with its short strike above resistance, gives the price a level to hold first. Options-based levels such as the options wall serve the same purpose.
- Credit vs width. A larger credit relative to the width improves the payoff but means a strike closer to the price.
- Skew. With the usual put skew, put spreads collect more than call spreads the same distance away. See volatility skew.
Worked example
Illustrative numbers only, not a recommendation. A stock trades at $100, with 35 days to expiry.
- Bull put spread: sell the $95 put for $2.00 and buy the $90 put for $0.40. Credit $1.60, so max profit $160, max loss (5 − 1.60) × 100 = $340, breakeven $93.40.
- Bear call spread: sell the $105 call for $1.80 and buy the $110 call for $0.40. Credit $1.40, so max profit $140, max loss (5 − 1.40) × 100 = $360, breakeven $106.40.
In the bull put spread, the stock can fall from $100 to $95 and the full $160 is still kept at expiry. At $92 the loss is (95 − 92) − 1.60 = $1.40 per share, or $140. At $90 or below the loss is the full $340.
Assignment and early exercise
- Short puts. On US stocks and ETFs, options are American-style. A deep in-the-money short put with little time value can be assigned early, leaving you long 100 shares; the long put still protects below its strike.
- Short calls and dividends. An in-the-money short call is most likely to be assigned just before the ex-dividend date. You would then be short the shares on the ex-date and owe the dividend.
- Between the strikes at expiry. If the stock closes between the two strikes, the short leg is assigned and the long leg expires worthless, leaving a stock position over the weekend. Closing before expiry avoids this, as well as pin risk near the short strike.
Limitations and common mistakes
- The maximum loss is usually larger than the maximum profit; a high probability of profit does not make the trade low risk.
- A gap on news or earnings can move the stock through both strikes overnight, with no chance to adjust.
- Mid-price fills are optimistic, especially on thinly traded strikes.
- Probabilities come from a model at today's implied volatility, not a forecast. Plan the size around the max loss; see stop-loss and position sizing.
In Clear Tape
Pro members can build a bull put spread or a bear call spread on any stock in the Options strategies section of the Options page. Each starts from a short strike near 30 delta, a wing about 2.5% of the share price wide and the expiry closest to 35 days, and the expiry, short strike, wing width and delta can all be adjusted. The build shows the legs' delayed quotes, the credit at mid and natural prices, max profit, max loss, breakeven, chance of profit, chance of touching the short strike, and checks such as whether the short strike sits beyond the put or call wall and whether earnings fall before expiry. No orders are placed; data reflects the previous session's close. See pricing.
For educational purposes only. Not investment advice.