A credit spread sells an option and buys a further out-of-the-money one at the same expiration, collecting a net credit. Max profit is the credit; max loss is the strike width minus the credit; both are fixed at entry.
A credit spread is a vertical spread opened for a net credit: one option is sold and a cheaper one further out of the money is bought, same underlying, same expiration. The option sold pays for the option bought, and the difference lands in the account on day one. The bought option is what turns an undefined-risk short option into a position whose worst case is known before the order is sent.
| Bull put spread | Bear call spread | |
|---|---|---|
| Legs | Sell a put, buy a lower put | Sell a call, buy a higher call |
| Outlook it is paid for | Stock stays above the short put | Stock stays below the short call |
| Keeps the full credit if | Stock is above the short strike at expiration | Stock is below the short strike at expiration |
| Breakeven | Short strike minus credit | Short strike plus credit |
| Delta | Positive | Negative |
Put one of each on the same expiration, both out of the money, and the result is an iron condor: two credit spreads that profit inside a range.
A stock trades at $100 with 30 days to expiration. A bull put spread sells the 95 put for $1.60 and buys the 90 put for $0.60. One contract covers 100 shares.
| Stock at expiration | What happens | Profit or loss per contract |
|---|---|---|
| $100 | Both puts expire worthless | +$100 |
| $95 | Both puts expire worthless | +$100 |
| $94 | 95 put worth $1.00, 90 put worthless | $0 |
| $92 | 95 put worth $3.00, 90 put worthless | -$200 |
| $90 or lower | Long 90 put offsets every dollar below 90 | -$400 |
The bear call version mirrors it: with the stock at $100, sell the 105 call and buy the 110 call for the same $1.00 credit; breakeven is $106 and the $400 maximum loss applies at or above $110.
Credit-to-width is the number that ties price to odds. Before costs, a spread's fair credit as a fraction of its width equals the market-implied probability of the stock finishing below (for puts) or above (for calls) a level between the two strikes, averaged across that range. A 0.20 ratio therefore prices roughly a one-in-five chance of the trade ending on its loss side. A richer credit is paid for with a higher chance of losing it; the probability of profit calculator shows both sides of that trade-off for any strikes.
Most of a credit spread's value sits in time and volatility until the stock approaches the short strike; from there it behaves increasingly like a bet on direction.
Published disciplines for credit spreads tend to share three rules, set at entry rather than improvised later: close at a fixed fraction of the credit collected, commonly half; close if the cost to buy back reaches a multiple of the credit; and exit some weeks before expiration, when gamma risk grows fastest. The reasoning behind each is in exit rules for credit spreads, what to do when the stock reaches the short strike is in managing a tested credit spread, and the checks run before entry (volatility richness, a short-strike delta band, liquidity, scheduled events, and a credit-to-width floor) are in how to evaluate a credit spread.
A defined-risk position that sells one option and buys another further out of the money at the same expiration, collecting a net credit. The credit is the maximum profit; the width of the strikes minus the credit is the maximum loss; both are fixed when the trade is opened.
Both are credit spreads. A bull put spread sells a put and buys a lower put, and keeps its credit if the stock stays above the short put. A bear call spread sells a call and buys a higher call, and keeps its credit if the stock stays below the short call.
Max loss is the width between the strikes minus the credit, times 100 per contract: a $5 wide spread opened for $1.00 can lose at most $400. Breakeven is the short strike minus the credit for a bull put spread and the short strike plus the credit for a bear call spread.
Yes. US equity options are American-style, so the short leg can be assigned at any time, most often when it is deep in the money with little time value left, or for a short call just before an ex-dividend date. The long leg still caps the loss, but the account holds shares until the position is closed or the long leg is exercised.