Credit spread is an options strategy where you sell one option and buy another at a different strike price, receiving a net credit. The long option provides protection and defines your maximum risk. Credit spreads profit from time decay and directional movement, making them popular income strategies with known risk parameters.
- Sell one option, buy another for protection
- Receive net credit upfront
- Max profit = credit; Max loss = spread width - credit
How Credit Spreads Work
Two main types of credit spreads:
Bull Put Spread (Bullish):
- Sell higher strike put
- Buy lower strike put
- Profit if stock stays above short put
Bear Call Spread (Bearish):
- Sell lower strike call
- Buy higher strike call
- Profit if stock stays below short call
Example - Bull Put Spread:
Stock: $100
Sell $95 Put: +$2.00
Buy $90 Put: -$0.75
Net Credit: $1.25
Max Profit: $1.25 (if stock above $95)
Max Loss: $5 - $1.25 = $3.75 (if stock below $90)
Breakeven: $95 - $1.25 = $93.75
Quick Reference: Credit Spreads
| Type | Sell | Buy | Outlook |
|---|---|---|---|
| Bull Put Spread | Higher put | Lower put | Bullish/Neutral |
| Bear Call Spread | Lower call | Higher call | Bearish/Neutral |
Example: Bull Put Spread
Selling Put Credit Spread:
| Leg | Strike | Premium |
|---|---|---|
| Sell Put | $95 | +$2.50 |
| Buy Put | $90 | -$1.00 |
| Net Credit | $1.50 |
| Outcome | P/L |
|---|---|
| Stock above $95 | +$1.50 (max) |
| Stock at $93.50 | $0 (breakeven) |
| Stock below $90 | -$3.50 (max loss) |
Credit spreads sell one option and buy another for protection, collecting a net credit. Bull put spreads are bullish; bear call spreads are bearish. Max profit is the credit received. Max loss is spread width minus credit. Defined risk makes them safer than naked selling.
Credit Spread Greeks
| Greek | Credit Spread |
|---|---|
| Delta | Short (opposite direction bias) |
| Gamma | Negative (hurts if stock moves) |
| Theta | Positive (time decay helps) |
| Vega | Negative (IV drop helps) |
When to Trade Credit Spreads
Ideal Conditions
- IV rank above 50% (elevated premium)
- Directional bias or range expectation
- 30-45 days to expiration
- Clear support/resistance levels
Avoid When
- IV very low (not enough premium)
- Before major events (risk of gap)
- Extremely tight spreads (bad risk/reward)
Managing Credit Spreads
Take Profits
Close at 50% of max profit. Don’t wait for expiration.
Cut Losses
Close if loss reaches 2× credit received.
Roll If Tested
If price approaches short strike, consider rolling out in time.
Common Mistakes
-
Spread too narrow – Wide spreads have better risk/reward but lower win rate.
-
Ignoring breakeven – Know where you start losing money.
-
Holding to expiration – Gamma risk increases. Take profits early.
-
Wrong direction bias – Bull put needs stock to stay up, not go up dramatically.
How JournalPlus Tracks Credit Spreads
JournalPlus logs both legs of credit spreads, tracks credit received, and helps you analyze which spread widths and days to expiration perform best.
