Credit Spreads
What It Is
A credit spread is an options strategy where the premium received from selling an option is greater than the premium paid for buying another option, resulting in a net credit.
Why It Matters
It allows traders to generate income with defined risk, often used when expecting limited price movement.
How It Works
- Sell a higher‑premium option
- Buy a lower‑premium option for protection
- Net result is a credit
- Maximum profit occurs if both options expire worthless
Key Components
- Defined risk
- Premium collection
- Directional or neutral bias
- Time decay advantage
Example
Selling a $50 put and buying a $45 put creates a bull put credit spread.
Key Takeaways
- Credit spreads profit from stability.
- Risk and reward are capped.
- Time decay works in your favor.