Definition
A credit spread is an options strategy where you simultaneously sell one option and buy another of the same type (both calls or both puts) with different strikes, receiving a net credit. Bull put spreads and bear call spreads are common credit spreads. Maximum profit is the premium received.
Formula
Max Profit = Net Credit | Max Loss = Strike Width - Net Credit
Example
Sell a $100 put, buy a $95 put for $1.50 net credit. Max profit is $150, max loss is $350 ($5 width - $1.50 credit).
FAQ
What is Credit Spread?
An options spread where you receive a net premium when opening.
How do you calculate Credit Spread?
A common formula for Credit Spread is: Max Profit = Net Credit | Max Loss = Strike Width - Net Credit
Why is Credit Spread important?
Credit Spread helps investors evaluate options and make more informed decisions.