Hong Life CalculatorsUnderstanding the options spread calculator — concept and principle
A vertical spread buys one option and sells another of the same type and expiry at a different strike. This calculator shows the profit or loss at a chosen price at expiry, the maximum profit and loss, the break-even price and the reward-to-risk ratio for bull call, bear put, bear call and bull put spreads.
How it is calculated
- At expiry a call is worth max(0, S − K) and a put max(0, K − S).
- Profit = value of the spread at expiry − net premium paid (or + net premium received), × shares per contract × number of spreads.
- Debit spreads (bull call, bear put): max loss = net premium; max profit = strike gap − net premium.
- Credit spreads (bear call, bull put): max profit = net premium; max loss = strike gap − net premium.
- Break-even: bull call = lower strike + debit; bear put = higher strike − debit; bear call = lower strike + credit; bull put = higher strike − credit.
The principle
Selling the second option reduces the cost of the first, but also caps the gain. Between the two strikes the spread's value changes one-for-one with the underlying; outside them it is fixed. That makes both the best and the worst outcome known in advance, which is why spreads are a common way to express a directional view with limited risk.
Worked example
Default inputs: bull call spread, buy the 100 call at 6.50, sell the 110 call at 2.50, price at expiry 107, 1 spread, 100 shares per contract.
- Net premium paid = (6.50 − 2.50) × 100 = 400.00 USD (shown as −400.00).
- At 107 the long call is worth 7, the short call 0, so the spread is worth 7 × 100 = 700 USD.
- Profit at 107 = 700 − 400 = 300.00 USD.
- Maximum profit = (10 − 4) × 100 = 600.00 USD; maximum loss = 400.00 USD.
- Break-even = 100 + 4 = 104; reward-to-risk = 600 ÷ 400 = 1.5×.
| Number of spreads | Profit or loss at the expiry price |
|---|---|
| 0.25 | $75.00 |
| 0.5 | $150.00 |
| 0.75 | $225.00 |
| 1 | $300.00 |
| 1.25 | $375.00 |
| 1.5 | $450.00 |
| 2 | $600.00 |
How to read the result
A higher reward-to-risk ratio usually comes with a lower chance of reaching the maximum profit. Compare the break-even with where you expect the price to be at expiry. Credit spreads profit if the price stays away from the short strike; debit spreads need the price to move in your favour.
Common mistakes
- Forgetting the contract multiplier (usually 100 shares).
- Ignoring commissions, which matter more on small spreads.
- Assuming you can always hold to expiry; American options can be assigned early.
- Mixing up which strike is bought and which is sold.
Frequently asked questions
What is a bull call spread?
Buying a lower-strike call and selling a higher-strike call with the same expiry; it profits from a moderate rise.
What is the maximum loss on a credit spread?
The strike gap minus the premium received, times the contract multiplier.
Why use a spread instead of a single option?
The sold option lowers the cost and the break-even, in exchange for capping the gain.
Sources: Options Industry Council, Strategies (bull call spread, bear put spread, bear call spread, bull put spread) · Hull, J. C., Options, Futures, and Other Derivatives (trading strategies involving options)