Credit Spreads: Bull Put and Bear Call Option Strategies
Two Types of Credit Spreads
| Factor | Bull Put Spread (Put Credit Spread) | Bear Call Spread (Call Credit Spread) |
|---|---|---|
| Outlook | Bullish to neutral | Bearish to neutral |
| Setup | Sell higher-strike put, buy lower-strike put | Sell lower-strike call, buy higher-strike call |
| Credit Received | Premium of sold put − premium of bought put | Premium of sold call − premium of bought call |
| Wins When | Stock stays above sold put strike | Stock stays below sold call strike |
| Max Profit | Net credit received | Net credit received |
| Max Loss | Spread width − net credit | Spread width − net credit |
How a Bull Put Spread Works
You sell an out-of-the-money put and buy a further OTM put at a lower strike, same expiration. You collect a net credit. If the stock stays above your sold put strike at expiration, both options expire worthless and you keep the entire credit.
Max Loss = (Sold Strike − Bought Strike) − Net Credit
Breakeven = Sold Strike − Net Credit
Example: Stock XYZ at $100. Sell the $95 put for $2.50, buy the $90 put for $1.00. Net credit = $1.50 ($150 per contract). Max profit = $150. Max loss = ($95 − $90) − $1.50 = $3.50 × 100 = $350. Breakeven = $95 − $1.50 = $93.50.
You win if XYZ stays above $93.50. Full profit if it closes above $95. The stock can even drop slightly and you still profit — that’s the edge of selling credit spreads.
How a Bear Call Spread Works
You sell an OTM call and buy a further OTM call at a higher strike, same expiration. You collect a net credit. If the stock stays below your sold call strike, both expire worthless and you keep the credit.
Max Loss = (Bought Strike − Sold Strike) − Net Credit
Breakeven = Sold Strike + Net Credit
Example: Stock XYZ at $100. Sell the $105 call for $2.00, buy the $110 call for $0.75. Net credit = $1.25 ($125 per contract). Max profit = $125. Max loss = ($110 − $105) − $1.25 = $3.75 × 100 = $375. Breakeven = $105 + $1.25 = $106.25.
Credit Spreads vs. Debit Spreads
| Factor | Credit Spreads | Debit Spreads (Bull Call/Bear Put) |
|---|---|---|
| Cash Flow at Entry | Receive premium (credit) | Pay premium (debit) |
| Probability of Profit | Higher (can win if stock stays still) | Lower (needs stock to move in your direction) |
| Risk-Reward | Max loss > max profit | Max profit > max loss |
| Theta | Positive — time decay helps | Negative — time decay hurts |
| Best For | Income generation, high-probability trades | Directional bets with defined risk |
| Margin Required | Yes — spread width minus credit | No — only the debit paid |
Choosing Strike Width and Probability
The width between strikes determines your risk-reward ratio. Narrow spreads ($2.50–$5 wide) offer smaller max loss but less credit. Wide spreads ($10–$20) collect more premium but have bigger max loss. The delta of your sold option tells you the approximate probability of that strike being breached:
| Sold Option Delta | Approximate Win Rate | Credit (% of Width) | Trade Style |
|---|---|---|---|
| 0.30 (30 delta) | ~70% | 25–35% | Aggressive — more premium, more risk |
| 0.20 (20 delta) | ~80% | 15–25% | Balanced — sweet spot for many traders |
| 0.10 (10 delta) | ~90% | 8–15% | Conservative — small premium, high win rate |
Managing Credit Spreads
Take profits early. Don’t hold to expiration hoping for every last penny. Close when you’ve captured 50–75% of max profit. This reduces risk of a reversal and frees up capital for new trades.
Cut losses at a defined level. A common rule: close if the spread doubles in value from your entry credit (i.e., your loss equals the credit received). Some traders use 2x the credit as a stop-loss.
Roll when necessary. If the stock is approaching your short strike, you can roll the spread out in time (to a later expiration) and potentially down/up in strike to collect additional credit and give the trade more room.
Key Takeaways
- Credit spreads collect premium upfront by selling a closer-to-the-money option and buying a further-OTM option for protection.
- Bull put spreads are bullish-to-neutral; bear call spreads are bearish-to-neutral — both profit when the stock stays away from the sold strike.
- They offer higher probability of profit than debit spreads but have a less favorable risk-reward ratio.
- The sold option’s delta approximates the probability of loss — lower delta = higher win rate but less premium.
- Manage actively: take profits at 50–75% of max, cut losses at 2x credit, and consider rolling when tested.
Frequently Asked Questions
What is a credit spread in options?
A credit spread is an options strategy where you sell one option and buy another at a different strike (same expiration), receiving a net premium. Your max profit is the credit; your max loss is the spread width minus the credit.
Are credit spreads good for beginners?
Credit spreads are among the best intermediate strategies. They have defined risk, benefit from time decay, and offer high probability of profit. However, you should understand how options work and the Greeks before trading them.
What is the difference between a bull put spread and a bear call spread?
A bull put spread uses puts and profits when the stock stays above the sold strike (bullish bias). A bear call spread uses calls and profits when the stock stays below the sold strike (bearish bias). Both are credit spreads with similar risk profiles.
How much can you lose on a credit spread?
Your maximum loss is the width of the spread (difference between strikes × 100) minus the net credit received. For example, a $5-wide spread that collected $1.50 in credit has a max loss of $3.50 per share ($350 per contract).
When should I close a credit spread?
Most traders close at 50–75% of max profit rather than holding to expiration. This locks in gains, reduces reversal risk, and frees up margin capital. If the trade moves against you, consider closing when the loss equals the original credit received.