Vertical Credit Spread Return on Risk
Annualized return on a defined-risk credit spread (bull put or bear call), measured as net credit divided by maximum risk (strike width minus credit), scaled to an annual rate.
When to use: Use for any vertical credit spread where you sell a closer-to-the-money option and buy a farther-out option of the same type and expiration. The denominator (width − credit) is the maximum loss per spread, so this formula expresses return on capital truly at risk.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| IRR | Annualized Return | Simple-annualized return assuming the option expires worthless | % |
| Today | Today's Date | Date the option is sold (trade date) | date |
| Expiration | Expiration Date | Date the option contract expires | date |
| NetCredit | Net Credit | Net premium received per share after debits, on a per-spread basis | $ |
| Width | Strike Width | Distance between the long and short strikes (per share) | $ |
Real-Life Examples
Example 1: $5-Wide Bull Put Spread
On April 29, 2026 you open a 30-day bull put spread expiring May 29, 2026: sell the $100 put, buy the $95 put, for a $1.50 net credit per share.
Given
Step-by-Step
Earning 42.9% on the $3.50 of capital truly at risk for 30 days annualizes to ~520%. Spreads put a small fraction of capital to work, so the headline yield-on-risk is dramatically higher than equivalent unhedged short premium.
Example 2: $10-Wide Bear Call Spread
On April 29, 2026 you open a 45-day bear call spread expiring June 13, 2026: sell the $200 call, buy the $210 call, for a $2.50 net credit.
Given
Step-by-Step
A 33% return on risk over 45 days annualizes to ~270%. Bear call and bull put spreads are mirrors — same math, opposite directional bias.
Frequently Asked Questions
Because the credit is yours from day one — only Width − Credit of additional capital can be lost. Some screeners use Width as the denominator, which understates yield slightly. Width − Credit is the standard "return on risk" convention.
No — debit spreads pay net premium up front, so the math inverts. For a debit spread, return on risk = (Width − Debit) / Debit if held to a maximum-profit expiration; closer to a directional bet than a yield trade.
Path-dependence (a spread can swing wildly before expiration), early assignment on the short leg (especially around dividends), commissions on the four-leg construction, and the probability of finishing within the spread (which the headline yield does not capture).
A high return on risk usually correlates with low probability of profit — a 5× yield-on-risk often comes with a ~20% chance of holding the full credit. Compare credit spreads against cash-secured puts on a probability-adjusted basis, not just a yield basis.