Credit Spread (Options)

Definition

The term credit spread refers to an options strategy where the premiums received are greater than those paid.  Credit spreads result in funds being credited to the investor's account when the position is first established.

Explanation

When the premium received from the short leg of a spread is greater than that paid for the long leg, the position is referred to as a credit spread and results in funds being deposited into the trader's account.  Credit spreads are a low risk, low reward strategy.  The net credit received when the position is established is the maximum profit achievable.

Credit spreads typically take one of the following forms:

  • Bull Put Spreads:  if the trader is bullish on the underlying security, they can establish a bull put spread by selling a higher premium in-the-money put option and buying a lower premium out-of-the-money put option on the same underlying security and the same expiration date.
  • Bear Call Spread:  if the trader is bearish on the underlying security, they can establish a bear call spread by selling a higher premium in-the-money call option and buying a lower premium out-of-the-money call option on the same underlying security and the same expiration date.

Related Terms

delta, delivery, time decay, debit spread