Credit Spreads: Bull Put and Bear Call Spreads for Income

A credit spread is opened by selling an option and buying a cheaper option of the same type and expiration further out of the money. You receive a net credit. You keep it if the underlying stays on the right side of your short strike until expiration. The long option caps your risk.

Bull put spread

Sell a put and buy a lower-strike put. You profit if the stock stays above the short strike.

Example: stock at $100. Sell the $95 put for $4.00, buy the $88 put for $2.00. Net credit: $2.00 ($200).

• Maximum profit: $200, if the stock is at or above $95.
• Maximum loss: width − credit = $7 − $2 = $5.00 ($500), at or below $88.
• Break-even: $95 − $2 = $93.

Bear call spread

Sell a call and buy a higher-strike call. You profit if the stock stays below the short strike. The calculations mirror the bull put spread: break-even is the short strike plus the credit.

Credit spreads vs naked options

Selling a put on its own has a much larger maximum loss. Adding the long put:

• Caps the loss.
• Reduces the margin required.
• Reduces the credit received.

For many traders, the defined risk is worth the smaller credit. It makes position sizing straightforward: size by the maximum loss. See position sizing.

The trade-off

Credit spreads usually have:

• A higher probability of profit than debit spreads at similar strikes.
• A maximum loss larger than the maximum profit.

So they can show a high win rate and still lose money overall if losses are not managed. Watch expectancy and profit factor, not just win rate.

Managing credit spreads

• Close early when most of the credit is earned, reducing exposure to late, high-gamma moves.
• Decide in advance when to exit a losing spread: a price level, a loss as a multiple of the credit, or a delta threshold.
• Be careful around earnings and ex-dividend dates. Short calls can be assigned early before a dividend. See assignment and expiration.

Two spreads together

A bull put spread and a bear call spread on the same underlying and expiration make an iron condor.

In TradeThink

Credit spreads are grouped into one trade, and the risk profile shows the credit, maximum loss and break-even. Results by strategy in the reports show how your spreads perform over time.