Credit spread

A credit spread is an options strategy involving two options at different strikes where the net result is a premium credit received upfront. You sell one option and buy another at a worse strike to cap your risk, keeping the difference as income.

Two main types:

• Bull put spread: Sell a higher-strike put, buy a lower-strike put , profit if stock stays flat or rises
• Bear call spread: Sell a lower-strike call, buy a higher-strike call , profit if stock stays flat or falls

Why credit spreads are popular: They're defined risk (max loss = spread width minus credit received), require less capital than naked options, and profit from the stock staying within a range rather than needing a large move. Time decay (theta) works in your favor as the options approach expiration.

Ideal conditions: High IV rank , elevated premium inflates the credit you collect. When IV rank is above 50, credit spreads offer better reward relative to risk than in low-IV environments.

Example: Sell the $500 put / buy the $495 put on SPY for a $1.30 credit. Max profit = $130. Max loss = $370. The spread profits if SPY stays above $498.70 at expiration.

Credit vs debit spread: In a credit spread you receive money upfront and want the options to expire worthless. In a debit spread you pay money upfront and need the stock to move in your direction.

Related terms: Debit spread, bull put spread, bear call spread, iron condor, defined risk, IV rank

Try it on Stryke: Find high IV rank credit spread candidates in the Options Screener.

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