Options & Derivatives
Vertical Spreads Explained: Bull Call, Bear Put, Credit and Debit
A vertical spread caps both ends of the payoff for a known cost. Here are all four, with the arithmetic that fixes the maximum profit and loss before you trade.
Two strikes $5 apart contain exactly $500, whatever you build between them. No arrangement of contracts produces a dollar more. A vertical spread decides how that $500 gets divided between you and whoever takes the other side, so buy one option and sell another of the same type and expiry at a different strike, and both ends of your payoff are fixed before the order fills.
The box, and the chain that fills it
Stock at $100, 42 days to expiry, one contract per leg, 100 shares each.
| Strike | Call | Put |
|---|---|---|
| $110 | $1.20 | $10.60 |
| $105 | $2.50 | $7.05 |
| $100 | $4.10 | $4.00 |
| $95 | $7.20 | $2.00 |
| $90 | $11.15 | $0.95 |
Every structure below is $5 wide, so
max value of a $5 wide spread = $5 x 100 = $500
Whatever you pay, the counterparty receives, and the two positions add to $500 at expiry in every state of the world. Nothing in the next four sections escapes that constraint.
Bull call spread, paying $160 for the box
Buy the $100 call at $4.10, and sell the $105 call at $2.50.
net debit = $4.10 - $2.50 = $1.60, so $160
max loss = net debit = $160
max profit = ($5 x 100) - $160 = $340
breakeven = long strike + debit = $100 + $1.60 = $101.60
| Stock at expiry | $100 call | $105 call | Spread value | P/L |
|---|---|---|---|---|
| $95.00 | $0 | $0 | $0 | -$160 |
| $100.00 | $0 | $0 | $0 | -$160 |
| $101.60 | $160 | $0 | $160 | $0 |
| $103.00 | $300 | $0 | $300 | +$140 |
| $105.00 | $500 | $0 | $500 | +$340 |
| $110.00 | $1,000 | -$500 | $500 | +$340 |
Set that against buying the $100 call outright for $410. The spread risks $160. The outright risks $410. It breaks even at $101.60. The outright needs $104.10, a materially easier bar. It pays for both improvements with everything above $105: at $110 the outright call makes $590 and the spread is stuck at $340, and at $160 the outright call makes an amount you will remember for years while the spread still makes $340.
Bear put spread, the same shape reflected
Buy the $100 put at $4.00, and sell the $95 put at $2.00.
net debit = $4.00 - $2.00 = $2.00, so $200
max loss = $200
max profit = $500 - $200 = $300
breakeven = long strike - debit = $100 - $2.00 = $98.00
| Stock at expiry | Spread value | P/L |
|---|---|---|
| $105.00 | $0 | -$200 |
| $100.00 | $0 | -$200 |
| $98.00 | $200 | $0 |
| $97.00 | $300 | +$100 |
| $95.00 | $500 | +$300 |
| $90.00 | $500 | +$300 |
This costs $40 more than its bullish mirror for $40 less maximum profit, which is skew doing its job: downside puts carry higher implied volatility than equidistant calls, so the bearish version of the same geometry is simply dearer. That asymmetry is permanent in index options and common in single stocks.
The two credit spreads
Sell the nearer strike, buy the further one. The cash arrives at the open. The long leg defines the disaster.
Bull put spread: sell the $95 put at $2.00, buy the $90 put at $0.95.
net credit = $2.00 - $0.95 = $1.05, so $105
max profit = $105
max loss = $500 - $105 = $395
breakeven = short strike - credit = $95 - $1.05 = $93.95
Bear call spread: sell the $105 call at $2.50, buy the $110 call at $1.20.
net credit = $2.50 - $1.20 = $1.30, so $130
max profit = $130
max loss = $500 - $130 = $370
breakeven = short strike + credit = $105 + $1.30 = $106.30
| Stock at expiry | Bull put P/L | Bear call P/L |
|---|---|---|
| $110.00 | +$105 | -$370 |
| $106.30 | +$105 | $0 |
| $105.00 | +$105 | +$130 |
| $100.00 | +$105 | +$130 |
| $95.00 | +$105 | +$130 |
| $93.95 | $0 | +$130 |
| $90.00 | -$395 | +$130 |
Both win across a wide band and lose in a narrow one. That is why they feel comfortable and why
the losses arrive in clumps. A bull put spread wins $105 four times and loses $395 once. That is
(4 x $105) - $395 = $25 over five cycles, before commissions on eight legs. The win
rate was 80%. The account is up $25.
All four on one line
| Spread | Legs | View | Cash flow | Max profit | Max loss | Breakeven |
|---|---|---|---|---|---|---|
| Bull call | Buy $100 call, sell $105 call | Up | Pay $160 | $340 | $160 | $101.60 |
| Bear put | Buy $100 put, sell $95 put | Down | Pay $200 | $300 | $200 | $98.00 |
| Bull put | Sell $95 put, buy $90 put | Up or flat | Receive $105 | $105 | $395 | $93.95 |
| Bear call | Sell $105 call, buy $110 call | Down or flat | Receive $130 | $130 | $370 | $106.30 |
Debit spreads risk a small amount to win a larger one. They require the stock to move. Credit spreads risk a larger amount to win a smaller one. They get paid for nothing happening. Neither arrangement has an edge built into it. I say that directly, because a great deal of options content implies otherwise. They are four ways of cutting one $500 box, and which one is priced attractively depends on implied volatility, which is where IV rank enters the decision.
Why the debit and credit versions are cousins
The bull call spread at $100 and $105 and a bull put spread at $100 and $105 have nearly identical payoff shapes, because both profit as the stock rises, both cap at the same strikes, and maximum profit plus maximum loss equals $500 in each. The differences are entirely practical.
The credit version has a short leg that can be assigned early. Assignment delivers or takes 100 shares and needs funding. The debit version keeps its short leg out of the money. Assignment is unlikely while the trade is working. Brokers hold the width less the credit as collateral on credit spreads. Capital committed equals maximum loss. And the implied volatility level tilts the pricing: rich readings make the short leg worth selling, cheap readings make the long leg worth buying.
This is where the textbook stops being useful. It will tell you the payoffs are equivalent, which is true in the model and false at your broker, where collateral treatment and assignment risk decide which one you should actually put on.
Width, assignment and expiry day
Width sets the scale and leaves the shape alone, so a $10 wide spread at the same deltas has double the maximum profit, double the maximum loss and roughly double the capital requirement. Choose width after deciding how many dollars the position is permitted to lose, using the sizing approach in risk management for traders.
Expiry day carries pin risk. People meet that mechanic for the first time at the worst possible moment. If the stock closes at $105.02 on the third Friday with a bear call spread open, the short $105 call is exercised and the long $110 call expires worthless, leaving you short 100 shares over the weekend with no hedge. Closing any spread whose short strike sits near the stock price avoids the outcome. It usually costs a few cents to do.
Where vertical spreads fail
They fail when the move is larger than the width. A bull call spread capped at $105 earns $340 whether the stock finishes at $106 or at $160, and the second outcome is the one you will still be describing at dinner parties. Spreads are the right structure when you have a target and the wrong structure when you are holding for a move of unknown size.
They also bleed through execution. Each spread has two legs and therefore two bid-ask spreads, so two cents of slippage per leg is $4 on a $160 position, or 2.5% of the capital before the stock moves at all. Send the order as a single net limit price on both legs at once, and be sceptical of any four leg structure on a chain quoting a dime wide.
Next: iron condors and strangles, which bolt two credit verticals together into a range trade, and the option Greeks for how a spread’s net delta, theta and vega behave once the legs offset. The options fundamentals quiz covers the breakeven arithmetic used here.
Frequently asked questions
What is a vertical spread?
It is two options of the same type and the same expiry at different strikes, one bought and one sold. Buying a $100 call and selling a $105 call is a vertical spread. The short leg pays for part of the long leg, which lowers the cost and caps the maximum gain at the distance between the strikes.
How do you calculate max profit and max loss on a debit spread?
The maximum loss is the net debit you paid. The maximum profit is the width between the strikes times 100, less that debit. Buying a $100 call at $4.10 and selling a $105 call at $2.50 costs $160, so the most you can lose is $160 and the most you can make is $500 minus $160, which is $340.
Is a credit spread better than a debit spread?
They are close substitutes for the same view. A bull call spread and a bull put spread at the same strikes have almost the same payoff, and the difference comes down to implied volatility, assignment risk on the short leg, and how your broker holds the collateral. Choose on those details rather than on whether cash arrives or leaves at the open.
What is the breakeven on a bull call spread?
The long strike plus the net debit. Buying the $100 call and selling the $105 call for a net $1.60 gives a breakeven of $101.60 at expiry. Below that the spread loses money, and above $105 it has already reached its maximum value and stops improving.
Can I be assigned early on a credit spread?
Yes, on the short leg, since American style equity options can be exercised at any time. Assignment on a short put delivers 100 shares and takes the strike price in cash, which needs funding even though the long leg still caps your loss. Closing a short leg that has gone deep in the money removes the problem before it arrives.
How much capital does a vertical spread tie up?
For a debit spread it is the debit itself, so $160 for the example above. For a credit spread brokers typically hold the width of the strikes times 100 less the credit received, which is $395 on a $5 wide put spread sold for $105. That held amount is also the maximum loss on the position.