Build bull and bear credit spreads

Identifier: C4T4L3 | Revision: 2026-10-26 | Planned study: 10–15 minutes, excluding extended practice.

Decision and objectives

Choose whether the method addresses this lesson’s task before placing an order. Objectives: 1. Construct a credit spread without reversing its direction. 2. Calculate terminal profit and loss bounds. 3. Stress collateral and leg execution.

Prerequisite: C4T4L2.

All numbers, quotes, contract terms and dates in the case are hypothetical teaching assumptions, not a listed series or offer. Unless varied below, options are European, expire together in 90 calendar days, are cash settled in TRY, and use 100 underlying units per contract. Premiums are TRY per underlying unit, paid at entry; signed quantities identify long (+) and short (−) legs. Assume no distributions and zero financing for the isolated payoff, no holiday adjustment, and final cash on the next business day. Actual tax is excluded, not assumed zero.

Mechanics

A credit spread receives more on a short option than it spends on a protective long option. A bull put credit spread sells the higher-strike put and buys the lower-strike put. A bear call credit spread sells the lower-strike call and buys the higher-strike call. The protection has a cost and only applies when it matches the short obligation. Received credit is not earned income on day one; the investor still has an open liability and collateral obligations.

Price and return drivers

Maximum terminal gain = credit minus total costs. Maximum loss = strike width × units −credit +costs. Bull put breakeven = short strike −net credit after costs per unit; bear call breakeven = short strike +net credit after costs per unit. Cash-settled equal-expiry European legs make the terminal calculation straightforward. Different fixing rules, physical deliverables or exercise styles can create cash timing and settlement mismatch even with the same displayed strikes.

Worked case

Synthetic bull put: −1 putK100 receiving6; +1 putK90 paying2. Credit400, charges40, width1000: maximum gain360 and maximum loss640, breakeven96.40. Separate bear call: −1 callK100 receiving7; +1 callK110 paying3. Same credit and charges: maximum gain360, maximum loss640, breakeven103.60.

The small credit is compensation for a larger adverse difference; it must be compared with that loss and its funding horizon.

Adverse case

An early close of the bull put at a supplied package ask7.50 per unit costs750; realized net =400−750−40=−390. This is a pre-expiry quote, not its eventual payoff. The intended640 maximum loss is a terminal economic bound, not a promise of640 initial collateral under a real account model. If only the short put fills, maximum loss at zero becomes10000−600 plus the applicable single-leg charges until protection is acquired. A gap, suspended long leg or physical assignment can produce much greater temporary cash demands.

Practical use

Read the account’s actual spread-offset and collateral policy. A mathematically bounded cash-settled difference does not establish a net-only margin or physical funding rule.

For any actual domestic implementation, verify the exact issue/contract, authorized intermediary, account permission and executable size. Include spread, commissions, passed-through fees, funding/borrow, custody and exercise/exit costs without double-counting embedded charges. Recheck income year, residency/status, issue/acquisition dates and effective tax law; all case results remain before actual tax.

Decision boundaries

Use a credit spread only when the strike interval and retained loss match the stated view and cash budget. Prefer the bounded structure over an uncovered sale when the objective requires a finite contractual expiry loss. Decline if protective-leg access is uncertain. Do not improve an unfavorable credit by silently widening the spread without recalculating loss. A high historical win rate does not resolve asymmetric severity or lack of executable exits.

Practice and references

Exercise: bear call spread−2 callsK120 at5, +2 callsK130 at2; multiplier100; fees50. Solution: Credit600, maximum gain550, maximum loss1450, breakeven122.75. AtS125 the spread pays out1000, leaving−450. A premium credit never means the position cannot lose.

Takeaway: Credit spreads receive cash while retaining a larger contingent obligation; collateral and leg timing remain separate. Reference links: product card, formula; glossary: Credit spread; Bull put spread; Bear call spread. Next: C4T4L4. Topic test.

Sources: Borsa Istanbul: Options (retrieved 2026-10-26; General information and basic concepts). Borsa Istanbul: Settlement Method (retrieved 2026-10-26; Settlement by contract family). Options Industry Council: All Strategies (retrieved 2026-10-26; Strategy descriptions). GIB: Provisional Article67 Guide for Individuals (retrieved 2026-10-26; Sections1,3–9 and19; publication introduction). Revision 2026-10-26; recheck changing terms before publication.

Shared reference guide