A credit spread is a two-leg options trade where you sell one option and buy another at a different strike to cap your risk. You collect a net premium upfront, and your maximum profit is that premium. Your maximum loss is the difference between the strike prices minus the credit received.

There are two common forms: the bull put spread, which profits when the underlying stays flat or rises, and the bear call spread, which profits when the underlying stays flat or falls. Both are defined-risk income strategies used by traders who want to collect premium without the unlimited downside of a naked short option.

This guide explains how each type of credit spread works, when to use them, and how to model the payoff before you place the trade.

How credit spreads work

Every credit spread involves two legs: a short option (the one you sell) and a long option (the one you buy). The short option generates the credit. The long option costs a smaller premium but acts as a ceiling on your potential loss.

Because you collect more premium than you pay, the net result is a credit to your account. That credit is your maximum profit, and it is yours to keep if both legs expire worthless. Your maximum loss is the width of the spread in strike price minus the credit received, multiplied by 100 shares per contract.

Here is a quick example of how the math works. You sell a $50 put and buy a $45 put for a net credit of $1.20. The spread width is $5.00. Your maximum profit is $120 per contract. Your maximum loss is $380 per contract. The breakeven price is $48.80, which is the short strike of $50 minus the credit of $1.20.

Bull put spread: the bullish-neutral credit spread

A bull put spread sells an out-of-the-money put at a higher strike and buys a lower-strike put as protection. You want the underlying to stay above your short strike at expiration so both puts expire worthless and you keep the full credit.

This trade fits a bullish or neutral outlook. It is a common choice when implied volatility is elevated because higher IV means larger premiums, which gives you a wider cushion between the breakeven price and the current price. Theta works in your favor from the moment you enter the trade.

Use the bull put spread calculator to model the exact max profit, max loss, and breakeven for your specific strikes before you place the order.

When to use a bull put spread

Bull put spreads work best when you expect the underlying to stay above the short put strike through expiration. Common setups include selling a spread below a strong support level or entering when a stock has pulled back and you expect a bounce. Avoid this trade if you are uncertain about the downside floor, because the defined-loss structure only helps if you close the position before the spread reaches full loss at expiration.

Bear call spread: the bearish-neutral credit spread

A bear call spread sells an out-of-the-money call at a lower strike and buys a higher-strike call as protection. You want the underlying to stay below your short call strike so both calls expire worthless and you keep the full credit.

This trade fits a bearish or neutral outlook. Like the bull put spread, it benefits from high implied volatility and time decay. The position profits most when the underlying is flat or falls from its current level into expiration.

Use the bear call spread calculator to calculate the exact breakeven, max profit, and max loss for your specific strikes and expiration before you execute.

When to use a bear call spread

Bear call spreads work best when you expect the underlying to stay below a resistance level or continue declining into expiration. They are commonly used after a failed breakout or when a stock has rallied sharply and implied volatility is elevated. The risk is defined, but the trade loses the full spread width minus the credit if the stock closes above your long call strike at expiration.

Bull put vs. bear call: which credit spread fits your trade?

The main difference is directional bias. A bull put spread is a bullish-to-neutral position that profits when the underlying rises or stays flat. A bear call spread is a bearish-to-neutral position that profits when the underlying falls or stays flat.

Both spreads have the same payoff structure: limited credit income, a defined maximum loss, and a breakeven price that depends on strike selection and the premium received. The choice between them depends entirely on which direction you expect the underlying to move, or whether you expect it to stay range-bound.

When you combine a bull put spread and a bear call spread on the same underlying, you create an iron condor, which profits when the underlying stays between both short strikes through expiration. The iron condor calculator lets you model this combined position with all four legs at once.

Modeling a credit spread before you trade

Before placing a credit spread, it is worth verifying the actual numbers rather than estimating them. The credit you receive, the maximum loss, and the breakeven price all change based on the strikes you choose and the bid-ask spread at the time you trade.

The option spread calculator covers all vertical spread types, including both credit and debit spreads. Enter your strikes, premiums, and expiration to see the full P&L profile and key Greeks before you execute the order.

Key inputs to verify before trading a credit spread:

• The net credit received, after accounting for bid-ask costs on both legs
• The spread width, which is the distance between strikes and sets your maximum loss
• The breakeven price, and how far it sits from the current price of the underlying
• Days to expiration and whether theta decay is working fast enough to close profitably before assignment risk increases

Managing a credit spread position

Many traders close a credit spread early when it has captured 50 to 75 percent of the maximum profit rather than holding to expiration. This reduces exposure to a last-minute reversal and frees up the margin requirement for the next trade.

If the trade moves against you and the underlying approaches your short strike, you have a few choices: close the spread to take the defined loss, roll the spread to a later expiration at a wider credit, or add a hedge. The right response depends on whether your original directional thesis still holds.

Credit spreads are often compared to debit spreads, which require paying premium upfront rather than collecting it. Debit spreads require a directional move to profit, while credit spreads profit from a move in a specific direction or from no move at all. For a full breakdown of how the two approaches differ in cost, risk, and payout structure, see debit spread vs. credit spread.