Directional Trading · Options Trading Guide
A credit vertical receives premium while accepting a bounded option payoff loss if the underlying moves through the protective strike.
Construct the bullish credit spread
A bull put spread sells a higher strike put and buys a lower strike put with the same underlying and expiration. Sell the 95 put and buy the 90 put for a $1.20 net credit. One standard spread receives $120. Maximum gross profit is $120, maximum option loss is $380 and expiration breakeven is $93.80. The $500 width is reduced by the credit when measuring loss.
Construct the bearish counterpart
A bear call spread sells a lower strike call and buys a higher strike call. Selling the 105 call and buying the 110 call for $1.40 credit creates $140 maximum gross profit, $360 maximum option loss and $106.40 expiration breakeven per standard spread. Both strategies can profit if price stays on the favourable side rather than requiring a large directional move.
Examine reward relative to loss
For the bull put example, a full $380 loss offsets more than three full $120 wins before costs. Frequent wins do not establish positive expectancy. Increasing position size because the displayed probability looks high can concentrate losses during a sharp market move. Evaluate the same risk budget used for other strategies and include correlated positions.
Plan the closing process
The opening credit compensates for an open obligation until the trade is closed or settled. Buying the first spread back for $0.30 locks $90 gross profit, not the full $120. Leaving a small remaining credit to expire introduces another decision about exercise and assignment. A protective option can limit the combined contractual payoff, yet it does not automatically manage every temporary share position created by assignment. Confirm broker handling and keep sufficient capacity for the lifecycle.
Try it yourself
A ten point credit spread receives $2.25. What is maximum option loss for one standard spread?
Show the worked answer
The width is $1,000 and the credit $225. Maximum option loss is $775 before costs, provided the complete spread is managed through settlement.
Further reading
Educational material. Examples and rates are hypothetical, not trade recommendations. Product terms, eligibility and risks vary by venue and jurisdiction.
