:: Profit & Loss

Profit

The profit on a Bull Call Spread is limited to the initial credit.

Loss

The loss on the Spread is limited to the difference between the strike prices minus the initial credit.

Break Even

The break even point is the higher strike less the credit received.

Bull Put Spread

The Bull Put Spread would be recommended when the share price is expected to rise moderately. Usually front-month options are used, as the effect of time decay on the value of options is greatest in the month ahead of expiration. As your goal is to have both options expire worthless, time decay in this instance is your friend.

:: Trading Condition

Stock	EBay
Price	$45.65
Outlook	Annual results should be just above "the Street's" estimate.

:: Alert Example

Action	Sell 1 Spread
Sell	$45.00 Put
Premium	$1.00
Buy	$40.00 Put
Premium	$0.10

	Strike	Option		Debit/
	Price	Premium	x 100	Credit
Sold Option	$45.00	$1.00	$100.00	Cr
Bought Option	$40.00	$0.10	$10.00	Dr

	Credit per single spread		$90.00	Cr

:: Margin

Unlike debit spreads, there is a margin requirement for credit spreads which your broker will require you to maintain in your account whilst you hold the position. You will find a detailed explanation of how to calculate the margin on a credit spread in Returns. In this case, the margin on 1 spread is $410.

:: Brokerage

There is no brokerage to exit this trade - if the market behaves as expected, both legs of the spread will expire worthless and you will keep your entire premium. This will occur if EBay's share price is trading at or above the higher strike price of $45.00 at expiration.

This absence of an exit brokerage is a significant factor to consider when deciding between credit spreads and debit spreads, particularly for those whose trading profile only allows for a small number of spreads to be traded at one time.