#verticalcreditspread

Vertical credit spreads have become one of the most popular options trading strategies for traders looking to generate consistent income while limiting risk. Among all underlying assets, SPY options remain one of the most actively traded because of their exceptional liquidity, tight bid-ask spreads, and broad exposure to the U.S. stock market.

Before trading any options strategy with real capital, many experienced traders perform options backtesting to understand how a strategy has behaved under different market conditions. Historical analysis cannot predict future returns, but it can help traders evaluate consistency, risk, and trade-offs.

What Is a Vertical Credit Spread?

A vertical credit spread is an options strategy that involves simultaneously selling one option and buying another option of the same type with the same expiration date but a different strike price.

There are two common types:

Bull Put Credit Spread – generally used when expecting SPY to remain above a certain price or move moderately higher.

Bear Call Credit Spread – generally used when expecting SPY to remain below a certain price or move sideways.

Because a premium is collected when entering the trade, these are known as credit spreads.

Why SPY Is Popular for Credit Spreads

SPY is one of the most liquid exchange-traded funds in the world, making it attractive for options traders.

Some advantages include:

High trading volume

Narrow bid-ask spreads

Multiple expiration dates

Strong historical price data for analysis

Efficient order execution

These characteristics also make SPY a common choice for options strategy backtesting.

Why Backtest Vertical Credit Spreads?

Many traders ask questions such as:

Which delta produces the best long-term results?

Should I trade weekly or monthly expirations?

Does implied volatility affect profitability?

What happens during bear markets?

How much drawdown should I expect?

Rather than relying on opinions, backtesting options strategies provides historical data that helps answer these questions.

A quality backtest allows traders to compare different rules across thousands of historical trades.

Factors That Influence Profitability

Several variables can significantly affect the historical performance of SPY credit spreads.

Strike Selection

Selling options further out of the money generally provides:

Higher probability of profit

Lower premium received

Selling strikes closer to the current price generally provides:

Higher premium

Greater assignment risk

Lower probability of success

Finding the right balance is one of the most important aspects of strategy optimization.

Days to Expiration

Many traders compare:

Weekly SPY options

30–45 day expirations

Longer-dated positions

Each approach has different characteristics regarding theta decay, premium collection, and overall risk.

Historical testing can reveal which expiration cycles align with a trader's objectives.

Implied Volatility

Implied volatility plays a major role in credit spread pricing.

Higher implied volatility often means:

Larger option premiums

Greater expected price movement

Increased market uncertainty

Some traders only open new credit spreads when implied volatility exceeds a predefined threshold, then compare results against strategies that trade continuously.

Important Performance Metrics

When evaluating a vertical credit spread strategy, experienced traders often review more than just the win rate.

Useful metrics include:

Total Return

Annualized Return (CAGR)

Maximum Drawdown

Profit Factor

Average Winner

Average Loser

Risk-Adjusted Return

Sharpe Ratio

Sortino Ratio

Percentage of Winning Trades

Looking at multiple statistics provides a more complete understanding than focusing on a single number.

Common Risk Management Techniques

Even defined-risk strategies require careful risk management.

Some common approaches include:

Closing trades early after capturing a portion of the premium

Limiting position size

Diversifying entry dates

Avoiding oversized positions during major market events

Adjusting exposure based on market volatility

Backtesting these rules can show how different management styles affect long-term consistency.

Common Mistakes When Backtesting

A backtest is only as reliable as its assumptions.

Common errors include:

Ignoring commissions and fees

Assuming perfect fills

Overfitting parameters to historical data

Ignoring periods of elevated volatility

Testing too short of a time period

Using several years of historical market data generally provides a more balanced picture than evaluating only recent market conditions.

Comparing Different Credit Spread Configurations

Many traders compare variables such as:

10 Delta vs 20 Delta

Weekly vs Monthly Expirations

Different spread widths

Early exits vs holding to expiration

Fixed profit targets vs time-based exits

Testing these combinations across multiple market environments can reveal strengths and weaknesses that are difficult to identify through live trading alone.

Building a Repeatable Trading Process

Rather than searching for a perfect strategy, many successful traders focus on building a repeatable process.

That process often includes:

Define objective entry rules.

Apply consistent risk management.

Backtest over multiple years.

Evaluate performance metrics.

Make incremental improvements.

Continue monitoring results as market conditions evolve.

Consistency is often more valuable than frequent strategy changes.

Final Thoughts

Vertical credit spreads remain one of the most widely used defined-risk options strategies for traders seeking premium income from SPY. While no strategy is guaranteed to be profitable in every market environment, backtesting vertical credit spreads can provide valuable insight into historical performance, drawdowns, and risk-adjusted returns.