Related Strategies:
- 📊 Iron Condor Strategy Guide - Neutral strategy (both sides)
- 💰 Cash Secured Puts Guide - Bullish without defined risk
- 📋 Top Options Strategies Ranked - Full comparison
What Are Credit Spreads? #
A credit spread is a two-leg options strategy where I sell an option closer to the money and buy a further out-of-the-money option for protection. I collect a net credit upfront and keep it if the market cooperates.
Bull Put Spread #
When to use: I’m bullish or neutral—I think SPY will stay above a certain level.
Structure:
- SELL a put at a higher strike (closer to the money)
- BUY a put at a lower strike (further OTM, protection)
- Collect a net credit
Profit if: SPY stays above the short put strike at expiration
graph LR
A[SPY Price] --> B{At Expiration}
B -->|Above Short Strike| C[Keep Full Credit ✅]
B -->|Between Strikes| D[Partial Loss ⚠️]
B -->|Below Long Strike| E[Max Loss ❌]
Example:
- SPY @ $594
- Sell $575 put @ $2.50
- Buy $570 put @ $1.50
- Net Credit: $1.00 ($100 per spread)
- Max Loss: $5.00 - $1.00 = $4.00 ($400)
Bear Call Spread #
When to use: I’m bearish or neutral—I think SPY will stay below a certain level.
Structure:
- SELL a call at a lower strike (closer to the money)
- BUY a call at a higher strike (further OTM, protection)
- Collect a net credit
Profit if: SPY stays below the short call strike at expiration
graph LR
A[SPY Price] --> B{At Expiration}
B -->|Below Short Strike| C[Keep Full Credit ✅]
B -->|Between Strikes| D[Partial Loss ⚠️]
B -->|Above Long Strike| E[Max Loss ❌]
Example:
- SPY @ $594
- Sell $615 call @ $2.30
- Buy $620 call @ $1.40
- Net Credit: $0.90 ($90 per spread)
- Max Loss: $5.00 - $0.90 = $4.10 ($410)
Bull Put vs Bear Call #
| Factor | Bull Put Spread | Bear Call Spread |
|---|---|---|
| Market View | Bullish/Neutral | Bearish/Neutral |
| Profit When | SPY rises or holds | SPY falls or holds |
| Best Environment | Uptrends, pullbacks | Resistance, overbought |
| Historical Edge | Stronger (markets rise long-term) | Works in consolidation |
| My Usage | 70% of credit spreads | 30% of credit spreads |
Why I favor bull puts: Markets have a long-term upward bias. Bull put spreads align with this tendency while still profiting from sideways action.
Why SPY for Credit Spreads? #
I use SPY instead of SPX for several reasons:
Why SPY Wins for Credit Spreads:
| Factor | SPY | SPX |
|---|---|---|
| Bid-Ask Spread | $0.01 typical | $0.05-0.10 |
| Liquidity | Highest in options market | Good but less than SPY |
| Strike Increments | $1 or $0.50 | $5 only |
| Contract Size | ~$594 × 100 = $59,400 | ~$5,940 × 100 = $594,000 |
| Position Sizing | Flexible for $25k-$100k | Requires larger accounts |
| Assignment Risk | Yes (American-style) | No (cash-settled) |
| Tax Treatment | Standard | Section 1256 (60/40) |
My Choice: SPY’s tighter spreads and flexibility outweigh SPX’s tax benefits for accounts under $250k. Better fills mean better returns.
When SPX makes sense:
- Portfolio over $250k
- Strong preference for cash settlement
- Tax optimization is priority
- Trading 0DTE specifically
Sources: TradeStation SPX vs SPY Analysis, TradingBlock 0DTE Comparison
The Volatility Risk Premium: Why This Works #
Credit spreads work because options are systematically overpriced. Buyers pay a “fear premium” for protection, and we collect that premium by being the insurance seller.
Credit spreads capture the Volatility Risk Premium (VRP)—the systematic overpricing of options due to demand for protection.
Current Market Context (January 2026):
| Metric | Value | Implication |
|---|---|---|
| SPY Price | ~$594 | Near all-time highs |
| VIX | ~16 | Low volatility regime |
| IV vs RV | 16% vs 10-11% | ~5% VRP edge |
| 50-day MA | ~$580 | SPY above (bullish) |
| 200-day MA | ~$560 | SPY above (bullish) |
This is an ideal environment for credit spreads—especially bull put spreads given the bullish technical picture.
Historical Performance Data #
| Period | Strategy | CAGR | Win Rate | Max DD | Sharpe |
|---|---|---|---|---|---|
| 2010-2020 | Bull Put Spreads (30-45 DTE) | 18-22% | 72% | -18% | 0.85 |
| 2021-2025 Bull | Bull Put Spreads | 25-30% | 78% | -12% | 0.95 |
| 2022 Bear | Bull Put Spreads | -18% | 55% | -22% | - |
| 2022 Bear | Bear Call Spreads | +12% | 68% | -8% | 0.70 |
| Low Vol (2026) | Bull Put Spreads | 20-25%* | 75%* | -10%* | 0.90* |
*Projected based on current conditions
Key Insight: Bull put spreads outperform in most years but suffer in bear markets. Bear call spreads act as a hedge during downturns.
My Trading Parameters #
Entry Checklist #
All must be YES before entering:
Market Context:
- VIX between 14-25 (not too low, not too high)
- SPY above 50-day MA (for bull puts) OR below resistance (for bear calls)
- No FOMC/CPI/Jobs report in 48 hours
- VIX term structure in contango
Position Setup:
- DTE: 30-45 days
- Short strike delta: 0.20-0.30
- Spread width: $5 (standard for SPY)
- Credit received: ≥ 15% of width ($0.75+ on $5 spread)
- Open interest: ≥ 500 per leg
- Bid-ask spread: ≤ $0.03 per leg
Risk Check:
- Max loss ≤ 2% of portfolio
- Not overlapping with existing positions
- Not revenge trading from prior loss
Position Management #
Profit Taking:
| Target | Action |
|---|---|
| 50% of max profit | Close position (my standard) |
| 70% of max profit | Close if DTE > 21 |
| 21 DTE remaining | Close if any profit exists |
Stop Loss:
| Trigger | Action |
|---|---|
| Loss = 1.5× credit | Evaluate closing |
| Loss = 2× credit | Close immediately |
| Short strike breached | Close or roll |
Rolling Rules:
- Only roll for a net credit
- Only roll to extend DTE (not strike closer to money)
- Maximum 2 rolls per trade
- Maximum 60 DTE total duration
Position Sizing Formula #
My 2% Rule:
Max Loss per Trade = 2% of Portfolio
Contracts = Max Loss ÷ (Spread Width - Credit) ÷ 100
Example ($100k portfolio):
Max Loss = $100,000 × 2% = $2,000
Spread Width = $5.00
Credit = $1.00
Max Loss per Spread = $5.00 - $1.00 = $4.00 = $400
Contracts = $2,000 ÷ $400 = 5 contractsPosition Sizing Table:
| Portfolio | Max Loss (2%) | $5 Width, $1 Credit | $5 Width, $0.75 Credit |
|---|---|---|---|
| $25,000 | $500 | 1 contract | 1 contract |
| $50,000 | $1,000 | 2 contracts | 2 contracts |
| $75,000 | $1,500 | 3 contracts | 3 contracts |
| $100,000 | $2,000 | 5 contracts | 4 contracts |
Understanding Your Greeks #
Bull Put Spread Greeks (at entry):
| Greek | Typical Value | What It Means |
|---|---|---|
| Delta | +0.15 to +0.25 | Profits from SPY rising |
| Theta | +$3-8/day | Earns money daily from decay |
| Vega | -$5-15 | Benefits from IV dropping |
| Gamma | -0.01 to -0.03 | Risk accelerates near expiration |
Bear Call Spread Greeks (at entry):
| Greek | Typical Value | What It Means |
|---|---|---|
| Delta | -0.15 to -0.25 | Profits from SPY falling |
| Theta | +$3-8/day | Earns money daily from decay |
| Vega | -$5-15 | Benefits from IV dropping |
| Gamma | -0.01 to -0.03 | Risk accelerates near expiration |
Key Insight: Theta is my friend (collecting premium daily). Gamma is my enemy near expiration (accelerates losses if tested).
Step-by-Step Trade Examples #
Example 1: Bull Put Spread (Bullish Setup) #
Market Conditions (January 19, 2026):
- SPY: $594
- VIX: 16
- 50-day MA: $580 (SPY above ✅)
- Trend: Bullish, recent pullback from $600
- Events: None in 48 hours ✅
My Analysis: SPY pulled back from recent highs but remains in uptrend. Looking for support around $575 (previous resistance, now support). Bull put spread below this level.
Position:
- Sell: 1 SPY Feb 21 $575 Put @ $2.65
- Buy: 1 SPY Feb 21 $570 Put @ $1.75
- DTE: 33 days
- Net Credit: $0.90 ($90 per spread)
- Short Strike Delta: ~0.22
- Distance OTM: 3.2% below current price
P/L Analysis:
| Metric | Value |
|---|---|
| Max Profit | $0.90 × 100 = $90 |
| Max Loss | ($5.00 - $0.90) × 100 = $410 |
| Breakeven | $575 - $0.90 = $574.10 |
| Risk/Reward | 1:4.6 |
| Probability of Profit | ~72% |
Scenario Analysis:
| SPY at Expiration | Spread Value | P/L |
|---|---|---|
| $594+ (unchanged or higher) | $0.00 | +$90 ✅ |
| $580 (-2.4%) | $0.00 | +$90 ✅ |
| $575 (-3.2%, at short strike) | $0.00 | +$90 ✅ |
| $574 (-3.4%, just below) | $1.00 | -$10 ⚠️ |
| $572.50 (-3.6%) | $2.50 | -$160 ⚠️ |
| $570 (-4.0%, at long strike) | $5.00 | -$410 ❌ |
| Below $570 | $5.00 | -$410 ❌ |
Key Point: SPY can drop 3.2% and I still make full profit. My breakeven is a 3.4% drop.
Order Entry (IBKR TWS):
-
Open Option Chain:
- Symbol: SPY
- Expiration: Feb 21, 2026 (33 DTE)
- Strategy Builder: “Vertical Spread”
-
Configure Spread:
- Sell $575 Put
- Buy $570 Put
- Verify: Shows as CREDIT spread
-
Set Price:
- Mid-price: $0.90
- Start at mid, adjust $0.01 every 60 seconds
- Max concession: $0.05 from mid
-
Submit:
- Order type: LIMIT
- Time in force: DAY
- Quantity: Based on position sizing
-
Set Alerts:
- Alert at 50% profit ($0.45)
- Alert at 2× loss ($1.80)
Day 1-10: Monitor
- Check daily: Is SPY holding above $580?
- If spread worth $0.45 or less → Close for 50% profit
Day 11-20: Active Management
- If profitable → Consider closing
- If SPY drops to $580 → Tighten monitoring
- If SPY drops to $578 → Prepare to close/roll
Day 21+ (< 21 DTE): Close if Profitable
- Any profit → Close position
- Gamma risk increases, don’t hold for last few dollars
If Tested (SPY approaches $575):
- Option 1: Close at defined loss
- Option 2: Roll down and out for credit (only if bullish conviction remains)
Example Roll:
- Close $575/$570 spread at loss
- Open $570/$565 spread 30 days out
- Must receive net credit to justify roll
Example 2: Bear Call Spread (Bearish Setup) #
Market Conditions:
- SPY: $594
- VIX: 16
- Technical: SPY at resistance ($600 recent high)
- RSI: 68 (approaching overbought)
- Events: None in 48 hours ✅
My Analysis: SPY approaching previous resistance at $600. Expecting consolidation or pullback. Bear call spread above resistance.
Position:
- Sell: 1 SPY Feb 21 $610 Call @ $2.15
- Buy: 1 SPY Feb 21 $615 Call @ $1.35
- DTE: 33 days
- Net Credit: $0.80 ($80 per spread)
- Short Strike Delta: ~0.24
- Distance OTM: 2.7% above current price
P/L Analysis:
| Metric | Value |
|---|---|
| Max Profit | $0.80 × 100 = $80 |
| Max Loss | ($5.00 - $0.80) × 100 = $420 |
| Breakeven | $610 + $0.80 = $610.80 |
| Risk/Reward | 1:5.25 |
| Probability of Profit | ~70% |
Scenario Analysis:
| SPY at Expiration | Spread Value | P/L |
|---|---|---|
| $594 or below (unchanged or lower) | $0.00 | +$80 ✅ |
| $600 (+1.0%) | $0.00 | +$80 ✅ |
| $610 (+2.7%, at short strike) | $0.00 | +$80 ✅ |
| $611 (+2.9%, just above) | $1.00 | -$20 ⚠️ |
| $612.50 (+3.1%) | $2.50 | -$170 ⚠️ |
| $615+ (+3.5%, at or above long strike) | $5.00 | -$420 ❌ |
Best Conditions for Bear Call Spreads:
| Condition | Check |
|---|---|
| SPY at or near resistance | ✅ |
| RSI > 65 (overbought) | ✅ |
| VIX rising or stable | ✅ |
| Recent failed breakout | ✅ |
| Bearish divergence on indicators | ✅ |
| Major indices showing weakness | ✅ |
Avoid Bear Calls When:
- Clear uptrend with momentum
- VIX < 14 (premiums too thin)
- Strong breakout above resistance
- Bullish news catalyst
My Usage: I trade 2-3 bear call spreads for every 7 bull put spreads. Markets go up more than down, so I use bear calls selectively.
Combining with Iron Condors #
Credit spreads are half of an Iron Condor. I often use them together:
graph TD
A[Market Assessment] --> B{Directional View?}
B -->|Strong Bullish| C[Bull Put Spread Only]
B -->|Mild Bullish| D[Iron Condor + Extra Bull Put]
B -->|Neutral| E[Iron Condor]
B -->|Mild Bearish| F[Iron Condor + Extra Bear Call]
B -->|Strong Bearish| G[Bear Call Spread Only]
C --> H[Collect ~$80-100/spread]
D --> I[Collect ~$90-120 total]
E --> J[Collect ~$70-90 total]
F --> K[Collect ~$90-120 total]
G --> L[Collect ~$70-90/spread]
style C fill:#0f5132,stroke:#75b798,color:#d1e7dd
style E fill:#1e3a5f,stroke:#60a5fa,color:#e2e8f0
style G fill:#664d03,stroke:#ffc107,color:#fff3cd
My Portfolio Allocation #
How I Allocate $100k Between Strategies:
| Strategy | Allocation | Monthly Target |
|---|---|---|
| Iron Condors (Neutral) | 50% | $500-750 |
| Credit Spreads (Directional) | 25% | $250-375 |
| CSPs (Quality Stocks) | 10% | $100-150 |
| Cash Buffer | 15% | - |
Combined Annual Target: $10,000-$15,000 (10-15%)
Credit spreads complement Iron Condors by:
- Adding directional exposure when I have conviction
- Capturing more premium in trending markets
- Providing flexibility to lean bullish or bearish
Risk Management: What Can Go Wrong #
The Dangers of Credit Spreads #
Primary Risks:
| Risk | Description | Mitigation |
|---|---|---|
| Wrong Direction | Bull puts in bear market = losses | Use market context filters |
| Gap Risk | Overnight gap through strikes | Avoid events, smaller size |
| Assignment (SPY) | Early assignment on ITM short | Roll early, close if deep ITM |
| Vega Spike | IV increase hurts open positions | Close or reduce when VIX spikes |
| Gamma Acceleration | Losses compound near expiration | Close at 21 DTE or before |
Historical Drawdowns #
| Event | Bull Put Impact | Bear Call Impact | My Response |
|---|---|---|---|
| 2022 Bear Market | -18 to -25% | +10 to +15% | Shifted to bear calls |
| COVID Crash (2020) | -30% if holding | +15% | Closed all, waited |
| 2018 Q4 Drop | -15% | +8% | Reduced size |
| Normal Corrections | -5 to -10% | Minimal | Held with stops |
Key Lesson: Don’t be married to one direction. Adapt to market conditions.
2022 proved that bull put spreads can suffer massive losses in sustained bear markets. Always have a plan for regime change and be willing to switch to bear call spreads when the trend turns.
My Stop Loss Rules #
| Scenario | Action |
|---|---|
| Spread at 1.5× credit (e.g., $1.35 for $0.90 credit) | Alert, evaluate |
| Spread at 2× credit (e.g., $1.80) | Close immediately |
| Short strike breached | Close or roll for credit |
| VIX spikes > 5 points in a day | Close all positions |
| Down 5% for the month | Reduce position sizes 50% |
Expected Returns: Realistic Projections #
What I Actually Achieve #
Typical Monthly Performance:
| Market Condition | Bull Puts | Bear Calls | Combined |
|---|---|---|---|
| Strong Uptrend | +2-3% | -1 to 0% | +1.5-2.5% |
| Mild Uptrend | +1.5-2% | +0.5-1% | +2-2.5% |
| Sideways | +1-1.5% | +1-1.5% | +2-3% |
| Mild Downtrend | 0 to -1% | +1.5-2% | +0.5-1.5% |
| Strong Downtrend | -2 to -5% | +2-3% | -0.5 to -2% |
Average Month: +1 to +2% on allocated capital
$100k Portfolio (25% to Credit Spreads = $25k at risk):
| Scenario | Monthly | Annual | Dollar Return |
|---|---|---|---|
| Conservative | 1.0% | 12% | $3,000 |
| Target | 1.5% | 18% | $4,500 |
| Optimistic | 2.0% | 24% | $6,000 |
Combined with Iron Condors (50% allocation):
- Iron Condors: $6,000-$9,000
- Credit Spreads: $3,000-$6,000
- Total: $9,000-$15,000 (9-15%)
Assumes no significant drawdowns. Actual results will vary.
When to Use Each Spread Type #
Your directional bias should come from price action and market structure, not hope. If you don’t have a clear view, trade an Iron Condor instead of forcing a directional spread.
Decision Framework #
graph TD
A[Start: Want to Trade Credit Spread] --> B{Market Trend?}
B -->|Clear Uptrend| C{SPY at Support?}
B -->|Sideways/Neutral| D{Which Side Looks Safer?}
B -->|Clear Downtrend| E{SPY at Resistance?}
C -->|Yes| F[Bull Put Spread ✅
Below support level]
C -->|No, Extended| G[Wait for Pullback
or Small Bear Call]
D -->|Puts Safer| H[Bull Put Spread
or Iron Condor]
D -->|Calls Safer| I[Bear Call Spread
or Iron Condor]
E -->|Yes| J[Bear Call Spread ✅
Above resistance level]
E -->|No, Oversold| K[Wait for Bounce
or Small Bull Put]
style F fill:#0f5132,stroke:#75b798,color:#d1e7dd
style J fill:#0f5132,stroke:#75b798,color:#d1e7dd
style G fill:#664d03,stroke:#ffc107,color:#fff3cd
style K fill:#664d03,stroke:#ffc107,color:#fff3cd
Quick Reference #
| Market Condition | Best Strategy | My Conviction Level |
|---|---|---|
| Strong uptrend, pullback to support | Bull Put Spread | High |
| Sideways, at bottom of range | Bull Put Spread | Medium |
| Sideways, at top of range | Bear Call Spread | Medium |
| Uptrend but extended/overbought | Bear Call Spread or wait | Low |
| Downtrend, bounce to resistance | Bear Call Spread | High |
| No clear trend, middle of range | Iron Condor | Neutral |
| High VIX (> 25), uncertain | Cash or reduce size | Very Low |
Expert Perspectives #
View: Credit spreads are a core tool for targeted VRP capture with directional overlay.
Key Insight: “The defined risk makes credit spreads scalable. Use them as one leg of a condor when you have mild conviction, or standalone when conviction is strong.”
For $100k Portfolios: Allocate 20-30% as complement to neutral strategies. Target Information Ratio of 1.0+.
View: Credit spreads shine in post-event momentum plays.
Key Insight: “Bull puts work best after the market has already moved in your favor and you’re betting on continuation. Don’t try to catch falling knives.”
Recommendation: 15-25% returns achievable with proper timing. Roll early in adverse moves to preserve capital.
View: Mathematical edge exists via VRP. Central Limit Theorem normalizes returns over many trades.
Key Insight: “Models show 15-25% edge for credit spreads in favorable regimes. Size to Kelly fraction (2-3% per trade) for sustainability.”
Warning: Small sample sizes plague backtests. Paper trade extensively before real capital.
Common Mistakes to Avoid #
I’ve Made These Mistakes (So You Don’t Have To):
| Mistake | Why It’s Bad | Solution |
|---|---|---|
| Trading against the trend | Bull puts in downtrends lose consistently | Respect the 50-day MA |
| Selling too close to the money | Higher premium but lower win rate | Stick to 0.20-0.30 delta |
| Ignoring events | FOMC/CPI gaps destroy spreads | Check economic calendar |
| Holding to expiration | Gamma risk accelerates | Close at 21 DTE or 50% profit |
| Over-sizing | One loss wipes multiple wins | Max 2% portfolio risk per trade |
| Not having a stop | Hoping for recovery | 2× credit loss = close |
| Revenge trading | Chasing losses compounds them | 24-hour cooling off after loss |
Trade Logging Template #
═══════════════════════════════════════════════════════
CREDIT SPREAD TRADE LOG
═══════════════════════════════════════════════════════
Date: ____________ Type: Bull Put / Bear Call
MARKET CONDITIONS
SPY at entry: $_______ VIX at entry: _______
50-day MA: $_______ Trend: Up / Down / Sideways
Events in 48h: _______________
POSITION
Short strike: $_______ Premium: $_______
Long strike: $_______ Premium: $_______
Width: $_______ Net credit: $_______
Contracts: _______ DTE: _______
Short delta: _______
RISK/REWARD
Max profit: $_______
Max loss: $_______
Breakeven: $_______
Portfolio risk: _______%
MANAGEMENT TARGETS
50% profit target: $_______
Stop loss (2×): $_______
RESULT
Exit date: ____________
Exit price: $_______
P/L: $_______ (____%)
Days held: _______
Win / Loss / Scratch
NOTES
What worked: _________________________________
What didn't: _________________________________
Lesson learned: ______________________________
═══════════════════════════════════════════════════════Key Takeaways #
Summary:
-
Credit spreads add directional flexibility to neutral strategies like Iron Condors. Use bull puts when bullish, bear calls when bearish.
-
SPY is ideal for most traders due to tighter spreads and better liquidity than SPX. Consider SPX only for accounts over $250k.
-
Bull put spreads align with market bias (long-term upward trend). I trade them 70% of the time, bear calls 30%.
-
Target 15-25% annualized with proper position sizing (2% max risk per trade) and management (50% profit target, 2× stop).
-
Combine with Iron Condors for a complete premium-selling portfolio. Allocate 50% to condors, 25% to credit spreads, 15% cash buffer.
-
Respect market conditions. Don’t force bull puts in downtrends or bear calls in strong rallies. Adapt or sit out.
-
Close at 50% profit or 21 DTE. Don’t hold for the last few dollars—gamma risk accelerates near expiration.
Related Resources #
- 📊 Iron Condor Strategy Guide - Neutral strategy for range-bound markets
- 📋 Iron Condor Entry Checklist - Detailed entry criteria
- 💰 CSP Strategy Guide - Bullish alternative
- 🏆 Top Options Strategies Ranked - Full comparison
Disclaimer: This is educational content based on personal experience and research. Options trading involves substantial risk and is not suitable for all investors. Past performance does not guarantee future results. The examples are hypothetical and may not reflect actual trading conditions. Always do your own research and consider consulting a financial advisor.
Sources: