Sell a call and buy a further-out call above it as cover. The credit arrives at entry and is kept if the underlying settles below the short strike, while the long call fixes what a rally through it can cost. It expresses a ceiling rather than a forecast — the market does not have to fall, only to fail to climb past a level you have chosen. The characteristic error is picking a strike that looks comfortably far away in dollars and is close in standard deviations. Set the strikes here and read the short leg delta beside the credit; it is the nearest thing to an odds estimate on the screen.
Structured and margined the same way as the put-side credit spread, with buying power set by the width minus the credit. The short call is the leg most likely to move against you overnight on single-name news, so position size here should account for a gap risk the payoff diagram itself does not show. A calendar check on the short strike's next earnings date is worth doing before entry; this structure is not usually opened deliberately through an event.
The margin held is the same width-minus-credit figure as the put-side version, and it is worth comparing the two side by side on the same underlying before choosing — equity index skew usually makes the put spread's credit larger for the same width, so the two are not mirror images in practice even though the payoff shapes are. Because the short call is the leg most exposed to a surprise announcement, some traders avoid opening new positions here in the days immediately before a name's scheduled earnings release. Closing at a fixed fraction of the credit, rather than holding to expiry, is the more common way this is managed.
Common mistake. The common mistake is opening this into a name with a scheduled catalyst nearby, treating a defined-risk structure as immune to a gap that can consume the entire width overnight.
| # | Action | Instrument | Strike |
|---|---|---|---|
| 1 | Sell | Call | 185 |
| 2 | Buy | Call | 195 |
Computed from the same strikes and net premium as the worked example above — not a simulation, the closed-form payoff evaluated at each price.
| NVDA at expiry | P&L |
|---|---|
| 170 | $235.00 |
| 180 | $235.00 |
| 190 | -$265.00 |
| 200 | -$765.00 |
| 210 | -$765.00 |
| 220 | -$765.00 |
| Strategy | Market view | Opened for | Legs vs. this one |
|---|---|---|---|
| Bear Put Spread | Bearish — moderate, defined range | Debit | same |
| Bull Put Spread | Bullish to neutral — income | Credit | same |
| Iron Condor | Neutral — range-bound | Credit | +2 |
| Covered Call | Neutral to mildly bullish — income | Debit or credit | same |