Level III Core · Options Strategies

Bull, Bear, Calendar Spreads and Collars Explained

Updated 8 October 2026 · Fact-checked

A spread combines two options on the same underlying to cap both cost and payoff. Vertical spreads differ in strike, calendar spreads differ in expiry, and a collar pairs a long put with a short call on a held asset. Solve by finding net premium, then payoff at each end.

Understand Spreads: Bull, Bear, Calendar and Collars

A single option gives open-ended payoff but costs a full premium. A spread lets you sell a second option to offset part of that premium. The price is that you give up some payoff. You trade potential for a cheaper or cheaper-to-hold position.

A vertical spread uses two options of the same type, same underlying and same expiry, but different strikes. A bull call spread buys a low-strike call and sells a high-strike call. It costs a net premium (debit) and profits if the price rises, up to the high strike. A bear put spread buys a high-strike put and sells a low-strike put. It also costs a net debit and profits if the price falls, down to the low strike. Bull and bear spreads can also be built the other way with credit: a bull put spread and a bear call spread. These receive a net premium.

A calendar spread uses the same type and strike but different expiries. You typically sell the near-dated option and buy the longer-dated one. When struck at the money, it is typically close to neutral on direction. Time decay is faster in the near option, so you profit from the decay of the near option if the price stays near the strike. The position is long vega because you hold the longer-dated option, so it benefits from a rise in implied volatility. Its payoff depends on the value of the long option at the near expiry, so there is no neat closed-form payoff at the end.

A collar is built on an asset you already hold. You buy a protective put and sell a covered call. The put sets a floor, the call sets a cap, and the call premium offsets the put cost. If the premiums are equal, it is a zero-cost collar. The investor accepts limited upside in return for downside protection. Always link the choice to the client: who needs protection, who accepts a cap, and what the tax and concentration issues are.

Key rules to remember

Bull call spread: net cost: Net debit = Premium of long call (low strike) − Premium of short call (high strike); The lower-strike call is always worth at least as much as the higher-strike call, so the net is a debit.
Bull call spread: max gain, max loss, breakeven: Max gain = (High strike − Low strike) − Net debit; Max loss = Net debit; Breakeven = Low strike + Net debit; Max gain occurs at or above the high strike. Max loss occurs at or below the low strike.
Bear put spread: net cost: Net debit = Premium of long put (high strike) − Premium of short put (low strike); Same logic as the bull call spread. The higher-strike put costs more.
Bear put spread: max gain, max loss, breakeven: Max gain = (High strike − Low strike) − Net debit; Max loss = Net debit; Breakeven = High strike − Net debit; Max gain occurs at or below the low strike. Max loss occurs at or above the high strike.
Collar on a held asset: value at expiry: Floor = Put strike; Cap = Call strike; Net cost = Put premium − Call premium; Net cost is positive for a net debit and negative for a net credit. Per unit, the value of the stock plus options at expiry is bounded between the put strike and call strike, and the net cost is then added to or subtracted from the result.
Collar: profit and loss bounds: Max loss = (S0 − Put strike) + (Put premium − Call premium); Max gain = (Call strike − S0) − (Put premium − Call premium); S0 is the price at which the position was entered. Put premium − Call premium is positive for a net debit and negative for a net credit, so a net credit reduces the max loss and raises the max gain.
Zero-cost collar condition: Put premium = Call premium; Choose the call strike that makes this hold for a given put strike.

How to solve Spreads: Bull, Bear, Calendar and Collars questions

Use the same order for every spread or collar question. It keeps the arithmetic clean and matches the points the grader looks for.

1Identify the view and the client need: bullish, bearish, neutral, or protecting a held asset.
2Write each leg: long or short, call or put, strike, expiry, premium.
3Compute the net premium: premiums paid minus premiums received. Mark it a debit or credit.
4Find the payoff at the ends: below the lower strike, between strikes, and above the higher strike.
5Compute max gain, max loss and breakeven using the net premium. Include any underlying position for a collar.
6Check that the numbers fit the shape: capped gain, capped loss, and a breakeven inside the strike range.
7State the conclusion in the words of the command: calculate, justify, or recommend. Tie it to the client's objective.

Quickest way: Strike width and net premium shortcut

When to use it: Use for any vertical spread question that asks for max gain, max loss or breakeven.

Strike width = high strike − low strike.
Net premium = long leg premium − short leg premium (debit spread).
Max loss = net premium. Max gain = width − net premium.
Breakeven: bull call, low strike + net premium. Bear put, high strike − net premium.
Sanity check: max gain + max loss = strike width.

Common mistakes in Spreads: Bull, Bear, Calendar and Collars

Forgetting to subtract the net premium from the strike width when finding max gain.
Students stop at the width of the strikes because it looks like the payoff.
Fix: Always compute max gain = width − net debit. Check that max gain + max loss = width.
Mixing up which leg is long in a bear put spread.
The word bear makes students think of selling the high strike.
Fix: Buy the put you want to profit from, the higher strike, and sell the lower strike put to cut cost.
Using the wrong breakeven formula for the bear put spread.
Students copy the bull call spread breakeven by habit.
Fix: For puts, breakeven is below the high strike: high strike − net debit.
Treating a calendar spread as a directional bet.
Vertical spreads are directional, so students assume all spreads are.
Fix: A calendar spread has the same strike. When struck at the money it is close to neutral on direction. It gains from time decay and stable prices near the strike, and it is long vega, so it is a view on volatility and time.
Ignoring the held asset when calculating collar max loss and gain.
Students look only at the option legs.
Fix: Measure from the purchase price S0. Max loss includes the drop from S0 to the put strike plus the net premium. Add the net premium if it was paid and subtract it if it was received.
Calling every collar zero-cost.
The term is used loosely.
Fix: Only call it zero-cost if the put premium equals the call premium. Otherwise state the net debit or credit.

Worked examples

Example 1

A manager buys a 100-strike call for 8 and sells a 110-strike call for 3 on the same stock and expiry. Calculate the maximum gain, maximum loss and breakeven of the position per share.

Show the solution

Net debit = 8 − 3 = 5.
Strike width = 110 − 100 = 10.
Max loss = 5, at or below 100.
Max gain = 10 − 5 = 5, at or above 110.
Breakeven = 100 + 5 = 105.

Answer: Maximum gain is 5, maximum loss is 5, and breakeven is 105 per share.

Example 2

A client holds a stock bought at 50. The manager buys a 45-strike put for 2.50 and sells a 58-strike call for 2.50 on the same expiry. Describe the position and calculate the maximum loss and maximum gain per share at expiry.

Show the solution

The put is long and the call is short on a held asset, so this is a collar.
Net premium = Put premium − Call premium = 2.50 − 2.50 = 0, so it is a zero-cost collar.
Max loss = (50 − 45) + 0 = 5, at or below 45.
Max gain = (58 − 50) − 0 = 8, at or above 58.
The client is protected below 45 and gives up gains above 58.

Answer: It is a zero-cost collar. Maximum loss is 5 per share and maximum gain is 8 per share.

Exam tips

Write the net premium first. Every other number depends on it, and a correct number alone earns credit.
Read the command word. Calculate needs a number, justify needs a reason tied to the client, and recommend needs a choice.
For collars, link the strategy to the client: protecting concentrated holdings while accepting a capped upside.
Expect item set questions that ask which view each spread expresses. Learn bull, bear, neutral and volatility views for each.
Check max gain + max loss equals strike width for debit spreads before moving on.

Spreads: Bull, Bear, Calendar and Collars in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Spreads: Bull, Bear, Calendar and Collars: frequently asked questions

What is the payoff of a bull call spread?

It pays nothing below the low strike and rises one-for-one between the strikes. Above the high strike it is flat at the strike width. Subtract the net debit to get profit.

How do I calculate the bear put spread max profit?

Take the strike width (high strike minus low strike) and subtract the net debit. The maximum profit occurs when the price is at or below the low strike at expiry.

What is the difference between a vertical spread and a calendar spread?

A vertical spread uses different strikes and the same expiry, and expresses a directional view. A calendar spread uses the same strike and different expiries, and mainly expresses a view on time decay and volatility.

What is a zero-cost collar?

It is a collar where the premium received from the short call equals the premium paid for the long put, so the net cost is zero. The investor pays for downside protection by giving up gains above the call strike.