Credit spread (options)
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In finance, a credit spread, or net credit spread, involves a purchase of one option and a sale of another option in the same class and expiration but different strike prices. Investors want credit spreads to narrow or expire for profit.
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[edit] Credit spread options
- A credit call spread is a "bearish" call spread, which has more premium on the short call. See bear call spread.
- A credit put spread is a "bullish" put spread and has more premium on the short put. See bull put spread.
[edit] Breakeven
To find the credit spread breakeven points for call spreads, the net premium is added to the lower strike price. For put spreads, the net premium is subtracted from the higher strike price to breakeven.
Most brokers will let you engage in these limited risk / limited reward trades.
[edit] Maximum potential
The maximum gain and loss potential are the same for call and put spreads. Note that net credit = difference in premiums.
[edit] Maximum gain
Maximum gain = net credit, realized when both options expire.
[edit] Maximum loss
Maximum loss = difference in strike prices - net credit.
[edit] See also
Credit Spread Screener avasaram.com
- Credit (finance)
- Credit risk
- Debit spread
- Yield curve spread
- Option adjusted spread
- Credit spread (bond)
[edit] References
- McMillan, Lawrence G. (2002). Options as a Strategic Investment, 4th ed., New York : New York Institute of Finance. ISBN 0-7352-0197-8.
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