Spread Summary Table
With all four vertical spreads covered, here is a single reference table comparing them side by side. This table covers each spread's direction, cash flow, and profit/loss boundaries.
All Four Vertical Spreads at a Glance
| Strategy | Type | Outlook | Max Gain | Max Loss | Breakeven |
|---|---|---|---|---|---|
| Bull call spread | Debit | Bullish | (High - Low) - Debit | Debit | Low strike + Debit |
| Bear call spread | Credit | Bearish | Credit | (High - Low) - Credit | Low strike + Credit |
| Bear put spread | Debit | Bearish | (High - Low) - Debit | Debit | High strike - Debit |
| Bull put spread | Credit | Bullish | Credit | (High - Low) - Credit | High strike - Credit |
Key Patterns
- Debit spreads: The investor wants options to be exercised, which requires significant price movement in the expected direction
- Credit spreads: The investor wants options to expire worthless, profiting from time decay and limited price movement
- In all vertical spreads: Max gain + Max loss = Spread width (the difference between strike prices)
This last point works as a built-in error check. If max gain and max loss do not add up to the difference between the two strikes, something went wrong in the calculation.
Debit vs. Credit: How to Remember
| Feature | Debit Spread | Credit Spread |
|---|---|---|
| Cash flow at opening | Pay net premium (cash out) | Receive net premium (cash in) |
| Wants movement? | Yes (needs price to move) | No (wants price to stay put) |
| Time decay effect | Works against the position | Works in favor of the position |
| Max loss = | Premium paid | Spread width - Premium received |
| Max gain = | Spread width - Premium paid | Premium received |
Think of it this way: Debit spreads are like buying insurance: you pay upfront and need something to happen (price movement) to collect. Credit spreads are like selling insurance: you collect a premium upfront and hope nothing happens (options expire worthless).
Exam Tip: Gotchas
- Debit or credit? If you NET paid money, it is a debit spread. If you NET received money, it is a credit spread. The option with the higher premium determines the direction of cash flow.
- Max gain + max loss must equal the spread width. If they do not, go back and recheck the calculation.