Credit Spread

A credit spread involves selling, or writing, a high-premium option and simultaneously buying a lower premium option. The premium received from the written option is greater than the premium paid for the long option, resulting in a premium credited into the trader or investor’s account when the position is opened. When traders or investors use a credit spread strategy, the maximum profit they receive is the net premium. The credit spread results in a profit when the options’ spreads narrow.

Call Credit Spread Example

Let’s say I think $SPY is going to depreciate over the course of the next two weeks. I can implement a credit spread strategy by writing one March call option with a strike price of $390 for $506 or $5.06/share (credit) and simultaneously buying one March call option at $400 for $53 or $0.53/share (debit). Since the usual multiplier on an equity option is 100, the net premium received is $453 (=$506 — $53) for the trade.

As long as the price of $SPY stays below $394.53 (breakeven), I make a profit!

In the following table are the components of this strategy: one long $400 call and one short $390 call: