Credit Spreads Explained: Bull Puts and Bear Calls

Defined-risk premium selling for traders who want structure, not drama

What a Credit Spread Actually Is

Most people hear "sell premium" and imagine time decay as a guaranteed paycheck. It isn't. Time decay is a force you can harness, but only if your position can survive normal market noise and the occasional punch in the mouth.

A credit spread is a simple engineering solution to that problem. You sell an option to collect premium, then buy another option farther away to cap your worst-case loss. You're accepting a tradeoff on purpose: limited upside (the credit) in exchange for limited downside (the cap). That's not a cheat code. It's structure.

The Only Math You Need

These three numbers tell you everything about a spread's payoff:

Max profit = credit received. If everything goes your way, you keep the credit and that's the end of the story.

Max loss = strike width - credit received. Strike width is simply the difference between your two strikes.

Breakeven at expiration: For a bull put spread, it's the short put strike minus the credit. For a bear call spread, it's the short call strike plus the credit.

That's enough to understand the payoff. The rest of the game is selecting strikes and managing time.

Bull Put Spread: The "Set a Floor" Trade

A bull put spread is what you use when you're bullish, or simply think price is unlikely to break a downside level. You're not asking for a rally. You're asking for "not a breakdown."

Structure: Sell a put closer to the money, buy a put farther out-of-the-money, same expiration.

Example

Assume a stock is trading at $100. You sell the $95 put for $2.00 and buy the $90 put for $0.50, collecting a net credit of $1.50 ($150 per spread).

Here's what that means in practice. Your spread width is $5. Your max profit is $1.50. Your max loss is $5 - $1.50 = $3.50 ($350 per spread). And your breakeven at expiration is $95 - $1.50 = $93.50.

Win condition: stock stays above $95 at expiration.

Worst case: stock is at or below $90 at expiration.

The personality of this trade matters: you're taking many small, structured wins and accepting that when the floor breaks, you'll take a defined hit. That's why distance and sizing aren't optional details, they are the strategy.

Bear Call Spread: The "Set a Ceiling" Trade

A bear call spread is the mirror image: you're bearish or neutral and believe price is unlikely to rip above a level. Again, you don't need a crash. You need price to behave.

Structure: Sell a call closer to the money, buy a call farther out-of-the-money, same expiration.

Example

Same stock at $100. You sell the $105 call for $2.00 and buy the $110 call for $0.60, collecting a net credit of $1.40 ($140 per spread).

Width is $5. Max profit is $1.40. Max loss is $5 - $1.40 = $3.60 ($360 per spread). Breakeven at expiration is $105 + $1.40 = $106.40.

Win condition: stock stays below $105 at expiration.

Worst case: stock is at or above $110 at expiration.

Same story, different direction: your trade is a bet that your ceiling holds.

The Four Decisions That Determine Survivability

A spread isn't just bullish or bearish. It's a set of decisions about whether you'll sleep at night.

Strike distance (how far OTM). Selling closer strikes pays more but forces more uncomfortable management. Selling farther strikes pays less but gives you breathing room and reduces decision fatigue. In real life, distance is risk management.

Spread width. Narrow spreads feel "small-risk" and can tempt oversizing. Wider spreads increase per-trade risk but often behave more smoothly. The right width is the one you can size responsibly and manage consistently.

Time (DTE). Short-dated spreads can decay quickly, but they get twitchy near expiration. The closer you get to the finish line, the more price moves can whip your P/L around. Many systematic traders avoid living in the last few days for exactly that reason.

Volatility. Higher IV often means richer credit, but it also means bigger potential moves. Don't treat juicy premium as a gift. Treat it like surge pricing for risk.

Strike Selection: Three Sane Frameworks

You don't need the "perfect" method. You need a repeatable one. Pick one of these and be consistent.

Delta-based (probability proxy). Many conservative spread sellers use short strikes around 0.10 to 0.20 delta; moderate sellers around 0.20 to 0.30. Lower delta usually means less credit but higher survival.

Expected-move-based. Position the short strike outside the market's priced "normal range." This can help you avoid selling right into the center of the storm, but it won't protect you from gaps.

Level-based (support/resistance). Useful as context, not a guarantee. Levels are not force fields, especially during fast markets.

Management Rules That Keep Spreads From Becoming a Lifestyle

This is where most traders either professionalize or churn.

Profit-Taking

A lot of consistent sellers prefer to close early at partial profits, because it reduces tail risk and avoids expiration drama. Common approaches include taking profits around 25% to 50% of max profit. If you get paid quickly, take the win quicker. Stop trying to win the last dime.

Loss Management

Define "uncle" before you enter. Pick a rule that forces action while the loss is still manageable. Common approaches include exiting or adjusting when the spread value hits roughly 1.5x–2x the credit received, or when the short strike is meaningfully threatened and time is running out.

Avoid rolling as a reflex. Rolling can be valid; rolling without a reason is just denial with extra steps.

The goal is not to be clever. The goal is to stay solvent, calm, and consistent.

Assignment Risk: The Practical Version

Assignment is less mysterious than people make it. Short calls can be assigned early more often around dividends, as call holders may exercise to capture the dividend. Short puts can be assigned early too, especially if deep ITM or late-cycle, but it's typically less common.

Practical takeaway: if your short option is drifting ITM late in the cycle and you're "hoping," you're already in the danger zone. Manage earlier.

The Mistakes That Make Spreads Feel "Rigged"

If you want to know why spreads blow up, it's usually one of these: selling too close because the premium looks "worth it," oversizing because "it's defined risk," trading spreads through binary events without a plan, stacking correlated positions that behave like one big bet, or waiting to manage until the position is already screaming at you.

Credit spreads are honest. They punish sloppy structure and reward disciplined structure.

Pre-Trade Checklist

Before you place a spread, you should be able to answer these quickly:

☐ What is my max loss in dollars, and can I tolerate it calmly?

☐ What is my profit-taking rule?

☐ What is my loss/adjustment rule?

☐ Is IV paying enough for the distance I'm taking?

☐ Is there an event risk (earnings, Fed, CPI) that changes the game?

☐ Am I accidentally stacking the same bet across correlated names?

If you can't answer those, it's not a system, it's an idea

Frequently Asked Questions

Which is better, bull puts or bear calls?

Neither is inherently better. Bull puts benefit from market drift (stocks tend to rise over time) but face larger gap risk to the downside. Bear calls can feel "safer" in range-bound markets but suffer in rallies. Pick based on your market thesis and where the premium is attractive, not on a blanket rule.

How wide should my spreads be?

Wide enough that you can size them responsibly. Narrow spreads tempt oversizing because the per-contract risk looks small. Wider spreads (say, $5 to $10 on most underlyings) tend to behave more smoothly and force better discipline. There's no magic number to only what you can manage consistently.

Should I always let spreads expire worthless?

No. Most systematic sellers close early at 25% to 50% of max profit. Holding to expiration chases the last dime while exposing you to gamma risk and assignment headaches. Take the win and redeploy capital.

What delta should I sell?

Conservative sellers often use 0.10 to 0.20 delta for the short strike; moderate sellers use 0.20 to 0.30. Lower delta means less credit but higher probability of profit. Higher delta means richer premium but more management. The "right" delta is the one that matches your temperament and lets you stay consistent.

How do I know when to roll vs. close for a loss?

Roll only if you'd enter the new position independently, not to avoid admitting a loss. If you're rolling just to "give it more time" without a real thesis change, you're compounding bad decisions. Define your exit rule before entry and follow it.

Bottom Line

Bull put spreads and bear call spreads are two of the cleanest ways to sell premium with guardrails. But they're only "easy" when you treat them like risk instruments, not lottery tickets.

The spread is just the wrapper. The real strategy is distance, sizing, and rules, especially the rule that prevents you from turning every challenged position into a rolling project.

Structure beats conviction. Process beats prediction. And defined risk is only as good as the discipline behind it.

Probabilities over predictions,

Andy Crowder

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Disclaimer: This is educational content only. Not investment advice. Options involve risk and aren't suitable for all investors. Examples are illustrative. Real results will vary. Talk to professionals before you risk real money