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Credit-spread payoffs

This page answers three practical questions for every credit spread: How much can I make? How much can I lose? Where is breakeven?

We will use simple formulas (rendered as math) and a payoff chart so you can see the shape — not a wall of ASCII art.

Not financial advice

Fees, early assignment, and broker margin change real outcomes. Numbers below ignore fees.

Shared vocabulary

Symbol Meaning
\(K_s\) Strike of the short option (the one you sold)
\(K_l\) or \(K_h\) Strike of the long option (put lower, call higher)
\(W\) Width of the spread = distance between strikes
\(C\) Net credit received when you open the trade (per share)

For one standard equity contract, multiply dollar results by 100, then by the number of contracts.

The two formulas you will reuse forever

For a credit spread (put or call):

\[ \text{Max profit} \approx C \]
\[ \text{Max loss} \approx W - C \]

Both are [verified] against standard vertical-spread references.

Put credit spread (PCS) — also called a bull put spread

Story: you collect a credit when you believe the stock will stay above your short put through expiration (or you exit before a full loss).

How you build it

  1. Sell a put at strike \(K_s\).
  2. Buy a put at a lower strike \(K_l\).
  3. Same expiration. Width \(W = K_s - K_l\). You receive net credit \(C\).

Outcomes at expiration (per share, ignore fees)

If the stock finishes… Approximate P&L
At or above \(K_s\) You keep about \(C\) (max profit)
At or below \(K_l\) You lose about \(W - C\) (max loss)
Between the strikes Something in between
Exactly at breakeven About zero when stock \(= K_s - C\)
\[ \text{Breakeven} = K_s - C \]

Payoff shape at expiration

The chart below is profit and loss versus stock price at expiration. Flat top = max profit. Flat bottom = max loss. The rising segment is the zone between strikes.

+C 0 -(W−C) Kl BE Ks price → PCS payoff at expiration
Flat floor = max loss; flat ceiling = max profit; zero line crossed at breakeven \(K_s - C\).

How to read it

  • Far left (stock crushed): you are at the max loss floor \(W - C\).
  • Far right (stock strong): you keep the credit \(C\).
  • The line crosses zero at breakeven \(K_s - C\).

Tiny numeric example

Suppose you sell the $100 put and buy the $95 put for a $1.20 net credit.

  • Width \(W = 5\)
  • Max profit \(\approx \$1.20\) per share ($120 per contract)
  • Max loss \(\approx \$3.80\) per share ($380 per contract)
  • Breakeven \(\approx \$98.80\)

Call credit spread (CCS) — also called a bear call spread

Story: you collect a credit when you believe the stock will stay below your short call (it will not “rip” higher through your strikes).

How you build it

  1. Sell a call at strike \(K_s\).
  2. Buy a call at a higher strike \(K_h\).
  3. Width \(W = K_h - K_s\). You receive net credit \(C\).

Outcomes at expiration

If the stock finishes… Approximate P&L
At or below \(K_s\) You keep about \(C\) (max profit)
At or above \(K_h\) You lose about \(W - C\) (max loss)
Between the strikes Something in between
Exactly at breakeven About zero when stock \(= K_s + C\)
\[ \text{Breakeven} = K_s + C \]

Payoff shape at expiration

+C 0 -(W−C) Ks BE Kh price → CCS payoff at expiration
Flat ceiling = max profit while stock stays below the short call; flat floor = max loss if stock runs through the long call.

How to read it

  • Far left (stock quiet or down): you keep the credit.
  • Far right (stock melts up): you hit the max loss.
  • Breakeven sits at \(K_s + C\).

Life of a trade (PCS example)

From open to one of three endings — the paths you will journal.

flowchart TD
  A[Open put credit spread<br/>collect credit C] --> B[Hold and monitor]
  B --> C[Stock stays above short put<br/>keep most or all of C]
  B --> D[Stock falls through the spread<br/>approach max loss W minus C]
  B --> E[Stock between strikes<br/>partial result — manage or hold]

Habits that matter more than memorizing letters

  1. Size from max loss \(W - C\), not from “the stock costs $X.” [verified] as standard defined-risk sizing.
  2. A wide spread can still lose a lot of money — “defined” means known, not small.
  3. A tiny credit on a wide width is usually a poor reward for the risk you defined.
  4. Prefer a spread over a naked short call: the long leg is what caps the disaster. [verified]

What to do next

Read Greeks enough to operate for how traders pick strikes with delta, then open the PCS playbook when you want the process end-to-end.

Sources

Not financial advice. Verify broker rules yourself.