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Credit spread

A vertical spread where the option sold is worth more than the option bought, so you collect premium and profit if the stock stays away from the short strike.

Payoff of a bull call spread at expiryA flat loss below the lower strike, a rising middle section, and a flat capped profit above the upper strike.Profit / loss per share08895115122100110buy the 100 callsell the 110 callBreakeven 103Max profit 7capped above 110Max loss 3 — the net debitUnderlying price at expiry
Vertical spread: payoff at expiry. Buying the 100 call and selling the 110 call costs 3 net. Below 100 that 3 is the whole loss; above 110 the gain stops at 7, because the sold call gives back every dollar the bought call earns beyond 110.

A bull put spread (sell a put, buy a lower put) profits if the stock stays above the short put. A bear call spread does the reverse. The credit is your maximum gain; the width minus the credit is your maximum loss.

Credit spreads are high-win-rate, low-payoff trades that harvest theta and benefit from falling implied-volatility. The occasional full loss is several times the typical gain, so sizing matters.

Example: stock at $100. Sell the $90 put for $1.50, buy the $85 put for $0.50. Credit $1.00 ($100). Max loss = $5 - $1 = $4 ($400) if the stock is below $85 at expiration.

Related: vertical-spread, debit-spread, iron-condor, theta, iv-rank

Educational only, not advice. Spotted an error? Post in Site Feedback.