Question 1

What is a vertical spread and why trade one instead of a single option?

Accepted Answer

A vertical spread is a two-leg options position where you buy one option and sell another of the same type (both calls or both puts) and same expiry, differing only in strike — the strikes sit vertically above one another on a chain, which is where the name comes from. You trade one instead of a naked long or short option to cap and define your risk: the option you sell pays for part of the one you buy, which lowers your cost on a debit spread or brings in income on a credit spread, and in return your profit is capped at the distance between the strikes. That trade-off is the whole point. A lone long call can lose its entire premium to time decay while you wait for a move that has to be large to pay off; a bull call spread costs less, breaks even sooner, and still profits from a moderate move — you simply give up the fat tail above the short strike. This calculator prices all four verticals so you can see exactly what you are capping and what you are keeping before you put the trade on.

Question 2

What is the difference between a debit spread and a credit spread?

Accepted Answer

A debit spread costs you money to open — you pay more for the option you buy than you collect for the one you sell, so cash leaves your account and that net debit is your maximum loss. Bull call spreads and bear put spreads are debit spreads; they profit when price moves in your direction, and your maximum gain is the strike width minus the debit. A credit spread pays you to open — you collect more for the option you sell than you pay for the protective wing, so cash comes in and that net credit is your maximum profit. Bull put spreads and bear call spreads are credit spreads; they profit when price stays away from the short strike, and your maximum loss is the strike width minus the credit. The practical difference is what you are betting on: debit spreads need a directional move to pay, credit spreads pay as long as the move you are fading does not happen. This calculator handles the sign automatically — enter your net premium as a positive number and pick the strategy, and it treats it as a debit or a credit correctly.

Question 3

How is the probability of profit calculated?

Accepted Answer

The probability of profit is the chance that price finishes on the winning side of your break-even at expiry. This calculator estimates it from your implied volatility and days to expiry by turning that volatility into a one-standard-deviation price move — spot times volatility times the square root of the time fraction of a year — and then measuring how many standard deviations your break-even sits from the current price. It assumes a roughly normal distribution of returns centred on today's price with no drift, which is the standard first-order approach and keeps the estimate honest: it does not secretly bake in a bullish or bearish forecast. For a debit spread the probability is the chance price travels far enough past break-even in your favour; for a credit spread it is the chance price simply stays on your side of break-even, which is why credit spreads often show a high probability of profit paired with a poor risk-to-reward — you win often but risk more than you can make. Treat the number as a planning estimate, not a guarantee: real crypto returns have fatter tails than the normal curve, so far-out-of-the-money outcomes happen more often than the model implies.

Question 4

Why is my credit spread's risk/reward so much worse than my debit spread's?

Accepted Answer

Because you are being paid for probability. A credit spread typically has a high probability of profit — price only has to stay away from your short strike — but the price of that high win rate is an ugly risk-to-reward: your maximum loss, the strike width minus the credit, is usually several times the credit you collected. A debit spread is the mirror image: a lower probability of profit because price has to actually move your way, but a much healthier risk-to-reward because the payout when you are right is a multiple of what you paid. Neither is free money. A one-in-ten spread that pays nine-to-one and a nine-in-ten spread that pays one-to-nine have roughly the same expected value before fees; the difference is the shape of your equity curve — frequent small wins with occasional large losses, or frequent small losses with occasional large wins. This calculator shows both numbers side by side, the probability of profit and the risk/reward, precisely so you choose the shape you can actually sit through rather than the one that looks best in isolation.

Vertical Spread Calculator

Payoff at expiry

Defined risk is the whole trade

The math