Quick Answer
A debit spread's net premium paid is its max loss; a credit spread's net premium received is its max gain. Call-spread breakeven uses the lower strike plus net premium; put-spread breakeven uses the higher strike minus net premium. Max gain and max loss on any spread always sum to the strike difference.
Now that you can calculate P&L for single options, spreads add a second leg. Every spread involves buying one option and writing another on the same underlying, creating a position with defined risk on both sides. The key formulas are consistent across all spread types.
What Distinguishes a Debit Spread From a Credit Spread?
Before looking at specific spreads, here is the framework:
- Debit spread: You pay more for the option you buy than you receive for the option you write. Net premium paid = your max loss.
- Credit spread: You receive more for the option you write than you pay for the option you buy. Net premium received = your max gain.
Think of it this way: Whichever option costs more determines the spread type. If you pay more than you receive, it is a debit spread. If you receive more than you pay, it is a credit spread.
| Feature | Debit Spread | Credit Spread |
|---|---|---|
| Net premium | You pay (net debit) | You receive (net credit) |
| Max gain | Strike difference - net debit | Net credit |
| Max loss | Net debit | Strike difference - net credit |
| Wants the spread to | Widen | Narrow or expire |
Exam Tip: Gotchas
- The more expensive option determines debit vs. credit. If you pay more than you receive, it is a debit spread; if you receive more, it is a credit spread.
- Max gain and max loss always sum to the strike difference. This is a quick check: if a spread has a $10 strike difference and max gain is $7, max loss must be $3.
How Do You Calculate a Bull Call Spread (Debit)?
Buy the lower-strike call, write the higher-strike call.
- Maximum gain = Difference between strikes - net premium paid
- Maximum loss: Net premium paid (net debit)
- Breakeven = Lower strike + net premium paid
Example: Buy 1 ABC 40 call at $5, write 1 ABC 50 call at $2
- Net debit = $5 - $2 = $3
- Breakeven = $40 + $3 = $43
- Max gain = ($50 - $40) - $3 = $7 per share ($700)
- Max loss = $3 per share ($300)
How Do You Calculate a Bear Call Spread (Credit)?
Write the lower-strike call, buy the higher-strike call.
- Maximum gain: Net premium received (net credit)
- Maximum loss = Difference between strikes - net premium received
- Breakeven = Lower strike + net premium received
Example: Write 1 ABC 40 call at $5, buy 1 ABC 50 call at $2
- Net credit = $5 - $2 = $3
- Breakeven = $40 + $3 = $43
- Max gain = $3 per share ($300)
- Max loss = ($50 - $40) - $3 = $7 per share ($700)
How Do You Calculate a Bear Put Spread (Debit)?
Buy the higher-strike put, write the lower-strike put.
- Maximum gain = Difference between strikes - net premium paid
- Maximum loss: Net premium paid (net debit)
- Breakeven = Higher strike - net premium paid
Example: Buy 1 ABC 50 put at $5, write 1 ABC 40 put at $2
- Net debit = $5 - $2 = $3
- Breakeven = $50 - $3 = $47
- Max gain = ($50 - $40) - $3 = $7 per share ($700)
- Max loss = $3 per share ($300)
How Do You Calculate a Bull Put Spread (Credit)?
Write the higher-strike put, buy the lower-strike put.
- Maximum gain: Net premium received (net credit)
- Maximum loss = Difference between strikes - net premium received
- Breakeven = Higher strike - net premium received
Example: Write 1 ABC 50 put at $5, buy 1 ABC 40 put at $2
- Net credit = $5 - $2 = $3
- Breakeven = $50 - $3 = $47
- Max gain = $3 per share ($300)
- Max loss = ($50 - $40) - $3 = $7 per share ($700)
What Is the Key Spread Formulas Summary?
| Metric | Call Spread | Put Spread |
|---|---|---|
| Breakeven | Lower strike + net premium | Higher strike - net premium |
| Max gain (debit) | Strike difference - net debit | Strike difference - net debit |
| Max loss (debit) | Net debit | Net debit |
| Max gain (credit) | Net credit | Net credit |
| Max loss (credit) | Strike difference - net credit | Strike difference - net credit |
Exam Tip: Gotchas
- For call spreads, the breakeven uses the lower strike + net premium. Memory aid: "CAL" = Calls Add to Lower.
- For put spreads, the breakeven uses the higher strike - net premium. Memory aid: "PSH" = Puts Subtract from Higher.
- This is the most common spread breakeven formula.
What Should You Check on Exam Day?
- Can you identify whether a two-leg position is a debit or credit spread from which leg costs more?
- Do you know that max gain and max loss on any spread always sum to the strike difference, so you can check your work?
- Can you apply "CAL" (Calls Add to Lower) and "PSH" (Puts Subtract from Higher) to find breakeven without re-deriving it?