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Credit-spread payoffs

You already saw that credit spreads are one defined-risk tool among several. This page is the math and shape for put and call credit spreads only.

Not financial advice

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

Reminder: why max loss often exceeds max profit

A credit spread collects a net credit \(C\) on width \(W\). Then:

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

Whenever \(C < W/2\), max loss is larger than max profit. That is common: you are selling a higher-probability zone for a limited paycheck, and you paid for the long option that caps disaster. Compare with a debit spread on the comparison page, where max profit can exceed the debit.

Shared symbols

Symbol Meaning
\(K_s\) Short strike
\(K_l\) / \(K_h\) Long put (lower) / long call (higher)
\(W\) Width between strikes
\(C\) Net credit per share

Multiply by 100 per standard equity contract.

Put credit spread (bull put)

Sell put \(K_s\), buy put \(K_l\), same expiry. \(W = K_s - K_l\).

Outcome Formula
Max profit \(C\) if stock ≥ \(K_s\)
Max loss \(W - C\) if stock ≤ \(K_l\)
Breakeven \(K_s - C\)
+C 0 -(W−C) Kl BE Ks price →

Example with a healthier credit (still loss > profit)

Sell $100 / buy $95 put spread for $2.00 credit ($200).

  • Max profit = $200
  • Max loss = $300
  • Breakeven = $98

Up ending (stock $110): +$200. Down ending through $95: −$300.
You improved the credit versus a skinny $1.50 example, but the structure still pays a limited reward for a defined larger loss — by design.

Call credit spread (bear call)

Sell call \(K_s\), buy call \(K_h\). \(W = K_h - K_s\). Breakeven \(K_s + C\).

+C 0 -(W−C) Ks BE Kh price →

Example

Sell $100 / buy $105 call spread for $1.80 credit.

  • Max profit = $180
  • Max loss = $320
  • Breakeven = $101.80

Habits

  1. Size from max loss \(W - C\), not share price.
  2. Defined ≠ small.
  3. Prefer this structure over a naked short when you want a known floor.
  4. If you dislike “loss larger than gain,” you may prefer debit spreads or long options for that idea — revisit the comparison.

What to do next

Defined-risk credit spreads · PCS playbook · CCS playbook

Sources

Not financial advice. Verify broker rules yourself.