Bull Call Spread and Bear Put Spread Explained
What you'll learn in this module
- Build a bull call spread and a bear put spread from the correct legs
- Calculate max loss, max profit and break-even for a debit vertical
- Explain how a debit vertical's value changes at expiration across price zones
Lesson
A debit vertical costs money to open. You buy the option closer to the money and sell one farther out of the money. The bought leg costs more, so you pay a net debit.
Bull call spread (call debit spread)
- Buy a call at a lower strike.
- Sell a call at a higher strike, same expiration.
- Generally helped by the stock rising.
Bear put spread (put debit spread)
- Buy a put at a higher strike.
- Sell a put at a lower strike, same expiration.
- Generally helped by the stock falling.
The math (per share; multiply by 100)
- Max loss = net debit. That's all you paid.
- Max profit = width - net debit.
- Break-even at expiration:
- Bull call: long strike + debit - Bear put: long strike - debit
Three zones at expiration Think of a debit vertical in three zones. Use a bear put spread as the example:
- Stock at or above the long (higher) put strike: both puts expire worthless. You lose the full debit.
- Stock between the strikes: the long put has intrinsic value and the short put is worthless. The spread is worth long strike - stock price. You may have a partial loss or a partial gain, depending on where the break-even sits.
- Stock at or below the short (lower) put strike: the spread is worth its full width. You reach max profit.
A bull call spread is the mirror image: full loss at or below the long call strike, full width at or above the short call strike.
Why a debit spread instead of a single option? The short leg pays for part of the long leg. That lowers your cost and your break-even. It also reduces how much time decay and volatility hurt you, because the short leg partly offsets the long leg. The price you pay for that is a cap on the gain.
Things to watch
- Time: a debit spread generally needs the stock to move in your direction before expiration. If it just sits still, the spread tends to lose value over time.
- Width vs. debit: a debit close to the width means little upside left. A very small debit usually means the strikes are far out of the money and less likely to finish in the money.
- Fills: two legs means two bid-ask spreads. Use a limit order at a net debit you choose.
The math here assumes you hold to expiration. In practice, many traders close spreads before then. Module 7 covers that.
Worked example
A bear put spread at expiration
Hypothetical: XYZ at $100. Buy the 30-day $100 put for $3.40 and sell the 30-day $95 put for $1.60.
- Net debit = $3.40 - $1.60 = $1.80, or $180 per spread. Max loss = $180.
- Width = $100 - $95 = $5. Max profit = ($5.00 - $1.80) x 100 = $320.
- Break-even at expiration = long strike - debit = $100 - $1.80 = $98.20.
- XYZ at $93 at expiration: spread worth its full $5 width = $500. Net = $500 - $180 = +$320 (max profit).
- XYZ at $97: long $100 put worth $3, short $95 put worthless. Spread = $300. Net = $300 - $180 = +$120.
- XYZ at $101: both puts expire worthless. Net = -$180 (max loss).
Max loss $180, max profit $320, break-even $98.20. The outcome is defined at both ends. Hypothetical prices, commissions ignored.
thinkorswim desktop (Windows)
Check the debit on the Risk Profile
In Trade > All Products, set the Spread selector to Vertical. Right-click a put vertical and choose the Analyze option for a buy trade, then open the Analyze tab and look at the Risk Profile. The expiration line shows a flat loss above the long strike, a flat gain below the short strike, and a slope in between. Hover over the line to see the P/L at different prices and find the break-even.
Key takeaways
- Bull call: buy lower call, sell higher call. Bear put: buy higher put, sell lower put.
- Debit spread max loss = net debit; max profit = width - debit.
- Call debit break-even = long strike + debit; put debit break-even = long strike - debit.
- A debit spread generally needs a move in your direction before expiration.
- Use a limit order at a net debit you choose.
Module 2 quiz
5 questions for practice. No pass or fail. You can retake it.