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Credit spreads, explained

Sell an option to collect premium, then buy a cheaper one further out to cap what the first can cost you. The difference is yours to keep; the gap between the strikes is the most you can lose.

Construction
Short option + long option, same expiry, further strike
Outlook
Directional or neutral, depending on which side
Premium
Collected at entry
Complexity
2 of 3

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What it is

A credit spread has two legs at the same expiry. The short leg is nearer the current price and collects the larger premium; the long leg is further away and costs less. Because you collect more than you pay, the position opens with a net credit — hence the name.

The long leg is the entire point. A naked short option has an enormous and, on the call side, theoretically unbounded worst case. Adding the long leg converts that into a fixed number known before entry: the distance between the strikes, less the credit collected. That number is also what a broker holds as margin.

The two variants differ only in which way they lean. A put credit spread is built below the current price and profits if the underlying stays above the short strike. A call credit spread is built above it and profits if the underlying stays below. Both are structurally identical otherwise.

How it works

  1. Choose a side

    Puts if you want the underlying to stay above a level; calls if you want it to stay below. This is the only directional decision in the structure.

  2. Sell the nearer strike

    This is the leg that collects. Nearer the current price pays more and is more likely to finish in the money.

  3. Buy the further strike, same expiry

    Same expiry is not optional — different expiries make it a diagonal, with a different and less predictable risk profile. The distance between the strikes is the spread's width.

  4. Note the two numbers before you enter

    Maximum gain is the net credit. Maximum loss is the width multiplied by a hundred, less the credit. Both are fixed at entry and neither can change.

The payoff

$82$89$95$102$108$09095$93.50
Max profit
$150
Max loss
−$350
Break-even
$93.50
A put credit spread: $95 put sold for $3.00, $90 put bought for $1.50. Net credit $150, maximum loss $350, both fixed at entry. This is the position at expiry only. Before expiry the same structure is worth something different, driven by the time remaining and by implied volatility — neither of which a payoff diagram shows.
Want to draw a different combination of strikes and premiums? The options payoff calculator takes any set of legs you enter and plots them. It runs in your browser and nothing you type is transmitted.

Worked example

XYZ is a placeholder, not a real security. Every guide in this section uses it at $100 so the structures can be compared directly.

XYZ trades at $100. You sell a $95 put for $3.00 and buy a $90 put for $1.50, both thirty days out. Net credit: $1.50 per share, $150 for the spread.

If XYZ finishes above $95, both legs expire worthless and you keep the full $150. This is the maximum gain and it does not improve if XYZ finishes at $96 or $160.

If XYZ finishes below $90, both legs are in the money. You lose the $5 width less the $1.50 credit — $350 — and that is the maximum loss however far below $90 it goes.

Break-even is $93.50: the short strike less the credit. Between $90 and $95 the result sits somewhere between the two extremes.

Note the ratio: risking $350 to make $150. That asymmetry is characteristic of the structure and is the reason the frequency of each outcome matters as much as its size.

Both sides of it

What it gives you

  • The worst case is fixed and known before the position is opened
  • Margin is capped at the spread's width rather than the short strike's full value
  • Far less capital than a cash-secured put on the same underlying
  • Profits if the underlying moves favourably, sideways, or even slightly against

What it costs you

  • The maximum gain is usually much smaller than the maximum loss
  • Two legs means two spreads to cross, on entry and again on exit
  • The long leg costs money and reduces what you collect
  • Early assignment on the short leg leaves a position that needs managing

What assignment does

Early assignment on the short leg delivers shares — bought at the short strike for a put spread, sold short for a call spread — while the long leg remains open. The position is still protected, because the long leg caps the damage, but it now ties up far more capital than the spread did. The usual response is to exercise the long leg or close everything at once.

Frequently asked questions

What is the difference between a put and a call credit spread?
Which direction they lean. A put credit spread is built below the current price and does well if the underlying stays above the short strike. A call credit spread is built above and does well if it stays below. Everything else — the defined risk, the width determining the worst case, the credit being the best case — is identical.
Why does the long leg matter so much?
It converts an open-ended risk into a fixed one. A naked short put on a $100 underlying risks $9,500 if the shares go to zero; on the call side the exposure has no ceiling at all. Adding a long leg five dollars away caps the worst case at $500 before the credit. It also cuts the margin the broker requires, which is what makes the structure accessible on a small account.
How wide should a credit spread be?
Width sets both numbers: a wider spread collects more credit and risks more, a narrower one collects less and risks less. The ratio between them stays broadly similar, so width is mostly a decision about position size rather than about the shape of the trade. What it should be in any particular case is not something this page can tell you.
What happens if the underlying lands between the strikes?
The short leg is in the money and the long leg is not, so the result falls between the maximum gain and the maximum loss, sliding linearly as the price moves through the range. Left to expiry this also creates assignment on one leg and not the other, which is why many holders close the position before expiry rather than letting it settle.

Related guides

These guides explain how each structure is built and how it behaves. Nothing here is a suggestion to buy or sell anything, no security is named, no figure is quoted from any market, and no structure is presented as better than another — which one suits a situation is not a question this page can answer.

⚠ Important disclaimer

These calculators are provided strictly for educational and informational purposes. They perform arithmetic on figures you enter. Nothing on these pages is financial, investment, trading, legal or tax advice, nor a recommendation to buy, sell or hold any security, derivative, commodity or cryptocurrency.

The creator is not a registered investment adviser, research analyst or broker with the SEC, FINRA, CFTC, NFA, any U.S. state securities regulator, or SEBI (as an Investment Adviser or Research Analyst). Trading involves substantial risk of loss — you can lose some or all of your capital, and with leveraged instruments you can lose more than you deposit.

Contract specifications, lot sizes and margin rates shown here are seeded from published standards, are editable, and may be out of date or wrong for your broker. Exchanges revise lot sizes and margin requirements, and brokers routinely impose more than the regulatory minimum. Verify every figure against your own broker before acting on it. These tools carry no warranty of any kind and may contain errors.

You are solely responsible for your own decisions. Read the full legal disclaimer →