Credit spread options put cash in your account the moment you open the trade. Instead of paying for directional exposure, you sell an option closer to the money and buy a cheaper option further out to cap your risk — the net result is a credit received upfront. You profit if the stock stays on the right side of your short strike, and you keep the entire premium if both options expire worthless.

- How a credit spread differs structurally from a debit spread
- The math for max profit, max loss, and breakeven on both call and put credit spreads
- The bull put spread and bear call spread — when to use each
- How probability of profit relates to the credit received
- Risk management rules for credit spread sellers

How Credit Spreads Work

A credit spread is built by selling one option (the short leg, closer to the money) and buying a cheaper option of the same type and expiration at a further strike (the long leg). Because the option you sell is worth more than the one you buy, the net cash flow is positive — you receive a credit.

What is the short leg in a credit spread?

The short leg is the option you sell to open the position. It generates the premium income that defines your max profit. The strike you sell is typically closer to the current stock price (closer to at-the-money), which means it has a higher probability of being tested. The long leg you buy further out of the money costs less, and its sole job is to cap your maximum loss if the trade goes wrong.

The credit received is your maximum profit. Your maximum loss is the difference between the two strikes minus the credit received — the worst case if the stock blows through both strikes. Because you receive cash upfront, credit spreads are popular in high-probability trading: the stock does not need to move in any direction, it only needs to stay away from your short strike.

Bull Put Spread — Collecting Premium on a Neutral-to-Bullish View

A bull put spread involves selling a put at a higher strike and buying a put at a lower strike. Both options share the same underlying and expiration. You collect a net credit and profit if the stock stays above your short put strike at expiration.

Formula: Bull Put Spread

For example, SPY is trading at $528. You sell the $520 put for $3.20 and buy the $510 put for $1.40. Net credit: . Strike width: .

  • Max profit: (collected upfront, keep if SPY stays above $520)
  • Max loss:
  • Breakeven:

Bear Call Spread — Collecting Premium on a Neutral-to-Bearish View

A bear call spread involves selling a call at a lower strike and buying a call at a higher strike. You collect a net credit and profit if the stock stays below your short call strike at expiration.

Formula: Bear Call Spread

For example, SPY is at $528. You sell the $535 call for $2.50 and buy the $545 call for $1.00. Net credit: . Strike width: .

  • Max profit:
  • Max loss:
  • Breakeven:
Why is max loss so much larger than max profit in credit spreads?

The risk/reward ratio of credit spreads appears unfavorable on its face — you risk $820 to make $180 in the bull put example. The compensation is probability. When you sell a spread with the short strike well below the current price, the stock has to fall significantly before you lose money. High-probability credit spreads (sold at 1 standard deviation out of the money) expire worthless roughly 84% of the time. The expectation value of the trade, when sized correctly and repeated consistently, can still be positive even with a skewed reward-to-risk ratio.

Stats Block

Parameter Bull Put Spread Bear Call Spread
Max Profit Net Credit × 100 Net Credit × 100
Max Loss (Width - Credit) × 100 (Width - Credit) × 100
Breakeven Short Put Strike - Credit Short Call Strike + Credit
Ideal Condition Stock stays flat or rises Stock stays flat or falls
Capital Required Max loss (held as margin) Max loss (held as margin)

Chart

SPY Bull Put Spread — $510/$520 (March 2026)

Buying vs Selling the Spread

Sell the $520 put, buy the $510 put, same expiration. Net credit received: $1.80 per share = $180 per contract. Max profit: $180 — keep the full credit if SPY stays above $520 at expiry. Max loss: $820 — occurs if SPY closes at or below $510 at expiry. Breakeven: $518.20 — SPY must stay above this level to avoid any loss. Capital required: $820 held as margin by the broker.

Worked Example

Ticker: AAPL (Apple Inc.) AAPL is trading at $192 in early March 2026. Earnings are three weeks away. You believe AAPL will remain above $180 through expiration regardless of earnings, and you want to collect income from elevated implied volatility.

Trade Setup — Bull Put Spread:

  • Sell AAPL March 28 $185 put at $3.60
  • Buy AAPL March 28 $175 put at $1.50
  • Net credit: per share → per contract received

Strike width: Max loss: Breakeven:

P&L at expiry scenarios:

  • AAPL closes at $195 (above short strike): Both puts expire worthless. You keep the full credit. Maximum profit.
  • AAPL closes at $182.90 (at breakeven): Short put worth $2.10, long put worth $0. Net P&L = $0.
  • AAPL closes at $179 (in the spread): Short put worth $6.00, long put worth $0. Loss = .
  • AAPL closes at $170 (below long strike): Spread worth the full $10. Loss = . Maximum loss.

Result: AAPL stayed above $183 through expiration — the spread expired worthless, and you kept the entire $210 credit on $790 of capital at risk: a 26.6% return on risk in 28 days.

What to Watch Out For

⚠️ WARNING
**Assignment risk near expiration.** If AAPL closes at $184 (between your two strikes) on expiration Friday, your short put is in the money and will likely be assigned, leaving you long 100 shares of AAPL at $185 over the weekend. Your long $175 put expires worthless. You now have full long stock exposure at a price above market, with no protective put. Always consider closing credit spreads before expiration if the short leg is in the money — do not assume both legs will be exercised symmetrically.

Pin risk at the short strike. If the underlying closes exactly at your short strike at expiration, assignment is uncertain. You might be assigned or you might not. This uncertainty creates uncontrolled risk over the weekend. The standard rule: close any spread where the short strike is within $0.50 of the closing price on expiration Friday.

Margin requirements vary by broker. Some brokers require you to post the full max loss as cash margin. Others use portfolio margin, which can reduce the requirement significantly. Know your broker's margin rules before scaling up credit spread size — an unexpectedly large margin hold can prevent you from placing other trades.

LESSON 20 TAKEAWAY
Set your credit spread exit rule before you enter: close the trade at 50% of max profit (when the credit has decayed by half) or at 2× the credit received as a stop-loss — never hold a credit spread all the way to maximum loss waiting for a reversal that may not come.

What's Next

Lesson 21 steps away from directional bets entirely. The straddle is a non-directional strategy: you profit when the stock makes a large move in either direction. If you have ever watched earnings season and thought "I know this stock is going to explode — I just don't know which way," the straddle was built for that moment.