Glossary
Credit spread (options)
An options position that sells one option and buys a further out-of-the-money one, collecting a net premium with capped risk.
On this page
An options credit spread is a two-leg position in which a trader sells one option and buys another of the same type and expiration with a strike further out of the money. Because the option sold is worth more than the one bought, the trader receives a net premium, the credit, when opening the trade. The bought option caps the loss. Credit spreads are one of the most common defined-risk ways to sell options. (In bond markets, "credit spread" means something different: the extra yield over Treasuries.)
The two basic versions
- Bull put spread: sell a put, buy a lower-strike put. It profits if the stock stays above the short strike.
- Bear call spread: sell a call, buy a higher-strike call. It profits if the stock stays below the short strike.
What to watch for
Credit spreads usually win small and lose bigger: the example risks $370 to make $130, which breaks even only if it wins about 74% of the time, before costs. The short option can be assigned early, especially around dividends for call spreads. A gap through both strikes reaches the full loss at once. Most brokers require a spread-level options approval and hold the maximum loss as margin.