Vertical Spreads Credit vs Debit: Payoff, Max Risk & Strike Selection

Education only. Options involve risk. Not investment advice.

TL;DR

A vertical spread combines selling one option and buying another at a different strike, same expiration. Credit spreads collect premium upfront and profit when the stock stays out of trouble. Debit spreads cost money upfront and profit when the stock moves in your favor. Both cap your risk and reward, making them ideal for defined-risk trading. Choose based on directional bias, IV environment, and breakeven requirements.

Introduction to Vertical Spreads and Types

A vertical spread is two options working together — one you sell, one you buy — at different strike prices but the same expiration date. The word “vertical” refers to the strikes being stacked on top of each other in an options chain, as opposed to horizontal (calendar) spreads where the expirations differ.

The purpose of the spread is to define your risk. When you sell an option, you collect premium but take on obligation. When you buy another option at a different strike, you cap how badly that obligation can hurt you. The result is a position with known maximum profit and known maximum loss before you ever enter the trade.

There are four main types of vertical spreads:

Spread Type	Direction	Cash Flow	Profit If…
Bull Call Spread	Bullish	Pay debit	Stock rises above long strike
Bear Call Spread	Bearish	Collect credit	Stock stays below short strike
Bull Put Spread	Bullish	Collect credit	Stock stays above short strike
Bear Put Spread	Bearish	Pay debit	Stock falls below long strike

Differences Between Credit and Debit Vertical Spreads

Credit spreads and debit spreads are mirror images of each other, but they behave differently and suit different market conditions.

Credit spreads collect premium upfront. You’re betting the stock stays away from your short strike. Time decay (theta) works in your favor — every day that passes without a big move helps your position. Credit spreads work best when implied volatility is high, because you collect more premium for the same risk.

Debit spreads cost money upfront. You’re betting the stock moves through both strikes in your favor. Time decay works against you — every day that passes without movement erodes your position. Debit spreads work best when implied volatility is low, because your entry cost is cheaper.

Feature	Credit Spread	Debit Spread
Upfront cash flow	Collect premium	Pay premium
Max profit	Net credit received	Width − debit paid
Max loss	Width − credit	Debit paid
Theta decay	Helps you	Hurts you
IV preference	High IV (fat premiums)	Low IV (cheaper entry)
Probability of profit	Typically 60–70%	Typically 40–50%

Calculating Breakeven Points and Max Risk

Understanding breakeven points and max risk is essential for sizing positions and managing trades.

Breakeven Point Formulas

For credit spreads, breakeven is calculated from the short strike:

Bull Put Spread: Breakeven = Short strike − net credit
Bear Call Spread: Breakeven = Short strike + net credit

For debit spreads, breakeven is calculated from the long strike:

Bull Call Spread: Breakeven = Long strike + net debit
Bear Put Spread: Breakeven = Long strike − net debit

Max Risk Calculation

For credit spreads:

Max Loss = (Width of spread − net credit) × 100
Max Profit = Net credit × 100

For debit spreads:

Max Loss = Net debit × 100
Max Profit = (Width of spread − net debit) × 100

Bull Put Spread Example (Credit)

Stock trading at $100. You sell the $95 put for $2.00 and buy the $90 put for $0.50.

Net credit = $2.00 − $0.50 = $1.50 ($150 per contract)
Max profit = $150 (if stock stays above $95)
Max loss = ($5 width − $1.50 credit) × 100 = $350
Breakeven = $95 − $1.50 = $93.50

Stock Price at Expiration	Profit/Loss
≥ $95	+$150 (max profit)
$93.50	$0 (breakeven)
≤ $90	−$350 (max loss)

Bull Call Spread Example (Debit)

Stock trading at $100. You buy the $95 call for $6.00 and sell the $100 call for $2.50.

Net debit = $6.00 − $2.50 = $3.50 ($350 per contract)
Max profit = ($5 width − $3.50 debit) × 100 = $150
Max loss = $350 (the debit paid)
Breakeven = $95 + $3.50 = $98.50

Stock Price at Expiration	Profit/Loss
≥ $100	+$150 (max profit)
$98.50	$0 (breakeven)
≤ $95	−$350 (max loss)

Strike Selection Strategies for Vertical Spreads

Strike selection determines your probability of profit, risk-reward ratio, and capital requirements.

Using Delta for Strike Selection

Delta approximates the probability of an option finishing in-the-money. This makes it useful for strike selection:

20 delta short strike → ~80% probability of profit
30 delta short strike → ~70% probability of profit
40 delta short strike → ~60% probability of profit

Higher delta strikes collect more premium but have lower probability of profit. Lower delta strikes have better odds but collect less premium.

Credit Spread Strike Selection

For credit spreads, the short strike is your “line in the sand.” The stock needs to stay on your side of this strike for maximum profit.

Conservative approach: Sell 15-20 delta options. Higher win rate, lower premium per trade.

Moderate approach: Sell 25-30 delta options. Balanced win rate and premium.

Aggressive approach: Sell 35-40 delta options. Higher premium, but lower probability and larger potential losses.

Debit Spread Strike Selection

For debit spreads, the long strike determines your primary exposure. The short strike caps your profit but reduces your cost.

High probability: Buy ITM or ATM long strike (50+ delta). Costs more but moves with the stock.

Balanced: Buy slightly OTM long strike (40-50 delta). Moderate cost and decent probability.

High leverage: Buy OTM long strike (20-30 delta). Cheaper entry but requires bigger move.

Spread Width Strategies

The distance between strikes affects risk and reward:

Width	Max Risk	Best For
$2.50-$5	$100-$400	Beginners, small accounts
$5-$10	$400-$900	Most retail traders
$10-$20	$900-$1,800	Larger accounts, fewer contracts

Narrower spreads are easier to size and limit damage. Wider spreads collect more premium but require more capital and have larger max losses.

Credit-to-Width Ratio

A good rule of thumb: aim for credit equal to 25-33% of the spread width.

For a $5-wide credit spread, target at least $1.25-$1.65 in credit. This gives you a reasonable risk-reward ratio where max profit is meaningful relative to max loss.

Payoff Diagrams: Understanding Risk and Reward

Payoff diagrams visualize your profit and loss at different stock prices. They’re essential for understanding what you’re risking and what you stand to gain.

Credit Spread Payoff Structure

Credit spreads have flat profit zones and flat loss zones with a diagonal transition between them.

Bull Put Spread Payoff:

Stock above short strike → Max profit (keep full credit)
Stock between strikes → Partial profit or loss
Stock below long strike → Max loss (width minus credit)

The profit zone is larger than the loss zone in dollar terms, but the loss zone is larger in point terms. This is why credit spreads win more often but lose more when they lose.

Debit Spread Payoff Structure

Debit spreads work the opposite way.

Bull Call Spread Payoff:

Stock above short strike → Max profit (width minus debit)
Stock between strikes → Partial profit or loss
Stock below long strike → Max loss (lose full debit)

The loss zone is the debit paid. The profit zone is the width minus debit. Debit spreads lose more often but the losses are limited to what you paid.

When to Choose Credit vs Debit Spreads

The decision depends on your outlook, the volatility environment, and your risk preferences.

Choose Credit Spreads When:

Implied volatility is elevated (IV rank above 50). Premium is rich, so you collect more for the same risk. Credit spreads benefit from IV contraction after entry.

You have neutral-to-directional bias. You don’t need the stock to move much — just to stay on your side. Credit spreads profit from time passing and the stock doing nothing.

You want higher probability trades. Selling 20-30 delta spreads gives you 70-80% win rates, though wins are smaller than losses.

Choose Debit Spreads When:

Implied volatility is low (IV rank below 50). Options are cheap, so your entry cost is lower. Debit spreads benefit from IV expansion after entry.

You have strong directional conviction. You expect the stock to move meaningfully in your direction. Debit spreads need movement to profit.

You want defined, upfront risk. Your max loss is the debit paid — no surprises. This makes position sizing straightforward.

Managing Vertical Spreads

Taking Profits Early

For credit spreads, taking profits at 50% of max profit is common. If you collected $1.00 and can close for $0.50, you’ve captured half your potential gain with most of your risk removed.

For debit spreads, take profits when the stock moves in your favor quickly. Don’t wait for max profit — time decay works against you.

Cutting Losses

For credit spreads, a common stop is 2× the credit received. If you collected $100, close if losses reach $200.

For debit spreads, close if your thesis is invalidated or if the option loses 50% of its value without the stock moving.

Rolling

Rolling means closing your current spread and opening a new one at a later expiration. This buys time but usually costs money. Roll only if you still believe in the direction — don’t roll just to avoid taking a loss.

Vertical Spreads on Robinhood

Robinhood supports vertical spreads for users with Level 3 options approval. You can enter both legs as a single order at your net credit or debit price.

To open a spread, select your underlying, tap Trade Options, and choose your expiration. Build the spread by selecting Sell for the short leg and Buy for the long leg (or vice versa for debit spreads). Robinhood calculates max profit, max loss, and breakeven automatically.

Watch for expiration handling. If the stock closes between your strikes, Robinhood may close your position early to avoid assignment risk. Close spreads yourself before expiration week to avoid this.

The main advantage is zero commissions. The main limitation is no advanced order types — you can’t automate profit targets or stop losses.

Vertical Spreads on Tradier

Tradier supports vertical spreads through multileg orders. Both legs execute as a package at your net price.

The TradePro interface shows Greeks across the full options chain, making strike selection easier. You can compare delta, theta, and premium across strikes without clicking into each one.

Tradier supports advanced order types like one-cancels-other (OCO) for automated profit/loss exits, and one-triggers-other (OTO) for conditional entries. This allows you to set your exit rules at entry and walk away.

Commissions are $0.35 per contract, or $0 with the $10/month Pro subscription. For active spread traders, the subscription pays for itself.

Summary and Practical Tips

Vertical spreads are the workhorse of options trading. They let you express a directional view with defined risk, collect premium without unlimited exposure, or make leveraged bets without paying full price for a long option.

Key takeaways:

Credit spreads collect premium upfront and profit from time decay. Best in high IV.
Debit spreads pay premium upfront and profit from stock movement. Best in low IV.
Max risk is always defined: width minus credit (for credit spreads) or debit paid (for debit spreads).
Breakeven = short strike ± credit (for credit spreads) or long strike ± debit (for debit spreads).
Use delta to select strikes based on probability targets.
Aim for credit equal to 25-33% of spread width for reasonable risk-reward.
Take profits early (50% for credit spreads) rather than holding to expiration.

Disclaimer: This is education only. Options trading involves significant risk and is not suitable for all investors. Consult a financial advisor before trading.