Now that you have a basic idea of what an option spread looks like (of course, limited to our simple vertical bull call spread), let's expand to other types of spreads and take a look at another example of a vertical spread. For this example, we’ll make time a friend to the spread trader.

## A Vertical Bear Call Credit Spread

Because the options used to construct the vertical spread expire at the same time, there is no need to be concerned with rates of time value decay across different months (such as in calendar spreads). To visualize the profit/loss dynamics of a vertical call credit spread, let's return to the example of a vertical call spread with MSFT options, where we bought the October 85 and sold the October 90, but this time for a hypothetical debit of \$120. Now we will reverse this order and generate a credit spread in the process. (For related reading, see Pencil in Profits in Any Market with a Calendar Spread.)

As seen in the figure below, the lower right-hand side of the profit/loss plot shows the maximum loss of \$320 and upper left-hand side shows the maximum profit potential of \$120. The maximum loss of \$320 results from the short October 85 call expiring in the money but having losses limited by the long side in the trade, the October 90 call.

In this example, we have taken in a net credit and will profit if the underlying stock closes below 86.20 (85 + 1.20 = 86.20) at expiration, which means we would want a neutral-to-bearish outlook on the stock when using this type of spread. The breakeven is determined by adding the premium of the spread (1.20) to the strike price (85). In other words, for a loss to occur, the stock must trade up to the short strike in the bear call spread and exceed the credit collected (1.20).

For example, if MSFT closes at 87 on expiration day, the short option will be in the money and settle at 2.00 (87 – 85 = 2.00). Meanwhile, the October 90 strike will have expired out of the money and be worthless. The trader will be debited 2.00 (the amount the October 87 is in the money) at settlement, which will be offset partially by the amount of premium collected when the spread was opened (1.20), for a net loss of -.80, or -\$80. Each spread would be a loss of \$80 in this scenario. (See also: How is a Short Call Used in a Bear Call Spread Option Strategy?)

Related Articles

### Which Vertical Option Spread Should You Use?

Knowing which option spread strategy to use in different market conditions can significantly improve your odds of success in options trading.

### What is a Bull Call Spread?

A bull call spread is an option strategy that involves the purchase of a call option and the simultaneous sale of another option.

### What Is A Bull Put Spread?

In a bull put spread, the options trader writes a put on a security to collect premium income and perhaps buy the security at a bargain price.

### What is a Bear Put Spread?

A bear put spread entails the purchase of a put option and the simultaneous sale of another put with the same expiration but a lower strike price.

A credit spread has two different meanings, one referring to bonds, the other to options.
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