All About Credit Spreads (Explained With Examples)

A credit spread involves purchase of one option (call or put) & the sale of another option, both with the same maturity and underlying security but with a different strike price. The main reason why this strategy is called a credit spread is because it involves net inflow of premium from the two positions involved in this strategy (for example, by selling a put with a higher premium and purchasing another put option with a lower premium).

The basic idea here is the transfer of credit risk from one party to another. This can be used as a risk management tool by option traders at the cost of giving up a limited amount of profit potential.

There are 2 types of credit spreads, differentiated based on whether the trader has a bullish or bearish stance on the underlying security. These are:

  1. Credit put spread
  2. Credit call spread

Credit put spread

Also known as the Bull put spread, this strategy involves the sale of a put option with a higher strike price (thus a higher option premium) and buying another option with a lower strike price (thus involves a lower option premium).

As the name suggests, one will use this strategy if he/she is of the opinion that the price of the underlying security will rise in future. The basic objective here is to take option positions in such a way so that both of them expire unexercised, leaving us the difference between the option premiums. Now we will look at an example to make things clear for you

Example:

Suppose I am bullish on a stock & the stock is trading at $40. To apply the strategy I will then sell a put option contract with a strike price of $45 for a cost of $4.75 and buy one put option contract with a strike price of $40 for $1.75, both for the same time period (let’s say a year). In this case, I will receive a total of $3 per share to set up this strategy ($4.75 – $1.75 i.e. $3). So now, what could be the possible cases that might arise at the end of the year?

Stock Price at Expiration Short 45 Put Profit/(Loss) at Expiration Long 40 Put Profit/(Loss) at Expiration Bull Put Spread Profit/(Loss) at Expiration
47 4.5 -1.5 3
46 4.5 -1.5 3
45 4.5 -1.5 3
44 3.5 -1.5 2
43 2.5 -1.5 1
42 1.5 -1.5 0
41 0.5 -1.5 -1
40 -0.5 -1.5 -2
39 -1.5 -0.5 -2

 

Case 1: When the stock price is above the higher strike price

Let’s say that the stock price is $46. In such a case, we can’t exercise our put option thus we subtract 1.5 from our calculation of the final position. At the same time, the party which bought the option from us also won’t exercise the option thus we add 4.5 to the calculation which leaves us with a profit of $3.

Case 2: When the stock price is in between the higher & lower strike price.

Let’s say that the stock price at the end is $41. In such a case, the other person will exercise his option, leaving us a total of $0.5, after including option cost (i.e. $4.5 – $4). On the other hand, we won’t exercise the put option, thus subtracting $1.5. This leaves us with a loss of $1.

Case 3: When the stock price is below the lower strike price

Let’s say that the stock price is $39. In this case, the value that we derive from our short put position is -$1.5 (i.e. $4.5 – $6). Also, we lose $0.5 (i.e. $1 – $1.5) from our long put position. This leaves us with a loss of $2.

Credit Call Spread

Also known as the Bear Call Spread, this strategy involves the sale of a call option with a lower strike price (thus a higher option premium) and buying another option with a relatively higher strike price (thus involves a lower option premium). As the name suggests, one will use this strategy if he/she is of the opinion that the price of the underlying security will fall in future. The basic objective here is to take option positions in such a way so that both of them expire unexercised, leaving us the difference between the option premiums (per share). Again, we will look at an example to make things clear for you

Example:

Suppose I am bearish on a stock & the stock is trading at $40. To apply the strategy I will then sell a call option contract with a strike price of $40 for a cost of $4.75 and buy one call option contract with a strike price of $45 for $1.75, both for the same time period (let’s say a year). In this case, I will receive a total of $3 per share to set up this strategy ($4.75 – $1.75 i.e. $3). So now, what could be the possible cases that might arise at the end of the year?

Stock Price at Expiration Short 40 Call Profit/(Loss) at Expiration Long 45 Call Profit/(Loss) at Expiration Bear Call Spread Profit/(Loss) at Expiration
47 -2.5 0.5 -2
46 -1.5 -0.5 -2
45 -0.5 -1.5 -2
44 0.5 -1.5 -1
43 1.5 -1.5 0
42 2.5 -1.5 1
41 3.5 -1.5 2
40 4.5 -1.5 3
39 4.5 -1.5 3

 

Case 1: When the stock price is above the higher strike price

let’s say that the stock price is $47. In such a case, the other party will exercise its call option Thus we will have to subtract $2.5 from our final position (i.e. $4.5 – $7). Similarly we will also exercise our call option, leaving us with $0.5 from this position. (i.e. $2 – $1.5). Considering both the positions, we incur a loss of $2.

Case 2: When the stock price is in between the higher & lower strike price.

Let’s say that the stock price at the end of the period is $41. In such a case, the other person will exercise his option, leaving us a total of $3.5, after including option cost (i.e. $4.5 – $1). On the other hand, we won’t exercise the call option, thus subtracting $1.5 from the final value. This leaves us with a profit of $2.

Case 3: When the stock price is below the lower strike price.

Let’s say that the stock price is $39. In this case, the value that we derive from our short call position is $4.5. Also, we lose $1.5 from our long call position. This leaves us with a profit of $3.

 

None of the content published on marketxls.com constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person.

The author is not offering any professional advice of any kind. The reader should consult a professional financial advisor to determine their suitability for any strategies discussed herein.

the article is written for helping users collect the required information from various sources deemed to be an authority in their content. The trademarks if any are the property of their owners and no representations are made

References:

  1. https://www.investopedia.com/terms/c/credit-spread-option.asp
  2. https://www.youtube.com/watch?v=sZrMhrmhDCQ

 

 

 

 

Verelq News |
21.04.2024

alexistogel macau

alexistogel

link alexistogel

situs alexistogel

alexistogel rtp

situs alexistogel

link alternatif alexistogel

alexistogel gacor

bandar alexistogel

alexistogel

alexistogel

alexistogel terpercaya

alexistogel gacor

alexistogel

alexistogel 4d

alexistogel

alexistogel

alexistogel gacor

alexistogel terpercaya

agen togel online

link alexistogel

alexistogel toto

alexistogel

alexistogel rtp

situs alexistogel

bandar alexistogel

alexistogel

link alexistogel

alexistogel

alexistogel togel slot

alexistogel

alexistogel online

alexistogel

alexistogel gampang menang

alexistogel 4d

alexistogel

alexistogel

alexistogel

alexistogel

alexistogel

alexistogel

alexistogel

alexistogel

alexistogel

alexistogel

alexistogel

alexistogel

alexistogel

alexistogel

alexistogel

alexistogel

slot gacor alexistogel

شرط بندی پرسپولیس شرط بندی استقلال شرط بندی روی تراکتورسازی تبریز شرط بندی روی سپاهان شرط بندی رئال مادرید بارسلونا شرط بندی شرط بندی psg سایت شرط بندی جام جهانی شرط بندی جام جهانی 2026 سایت شرط بندی جام جهانی 2026 بازی انفجار رایگان سایت انفجار ضریب بالا بهترین سایت شرط بندی فارسی شرط بندی بدون فیلتر شرط بندی بازی رولت شرط بندی پوکر شرط بندی مونتی شرط بندی سنگ کاغذ قیچی شرط بندی بلک جک کرش رویال بت پاسور شرط شرط بندی تخته نرد آنلاین انفجار 2 بت شرط بندی بازی اسلات شرط بندی بازی پوپ سایت سامان بت ریور پوکر 2024 سایت 4030bet ورود به بازی انفجار دنس بت شرط بندی انفجار دنس آموزش بازی پوکر سایت شرط بندی 123 بهترین شرط بندی بهترین سایت شرط بندی انفجار اپلیکیشن بازی انفجار دانلود بازی انفجار انفجار بازی ربات بازی انفجار کازینو آنلاین ایرانی انفجار پولساز ورود به بازی انفجار بازی انفجار با شارژ 10 تومن سایت bet betyek وان ایکس برو آدرس سایت بت یک سایت دوست دختر اونلی فنز فارسی پیدا کردن دوست دختر ورود به ریور پوکر پدرام مختاری پویان مختاری نازنین همدانی مونتیگو داوود هزینه بیوگرافی آیسان اسلامی بیوگرافی دنیا جهانبخت سایت رسمی حسین تهی بیوگرافی کوروش وانتونز سایت آرتا وانتونز رها وانتونز بیوگرافی ربکا قادری سحر قریشی بیوگرافی تتلو بیوگرافی مهدی طارمی الناز شاکردوست سایت عادل فردوسی پور بیوگرافی نیلی افشار بیوگرافی محمدرضا گلزار سایت armin2afm بیوگرافی شادمهر عقیلی بیوگرافی سردارآزمون بیوگرافی علیرضا بیرانوند بیوگرافی رامین رضاییان وریا غفوری بیوگرافی علی دایی بیوگرافی پوریا پوتک مدگل سایت حصین بیوگرافی صدف طاهریان فرشاد سایلنت بیوگرافی آریا کئوکسر بیوگرافی sogang بیوگرافی میا پلیز بیوگرافی مهراد هیدن سایت رسمی سهراب ام جی بیوگرافی علیرضا جی جی بیوگرافی بهزاد لیتو اشکان فدایی بیوگرافی رضا پیشرو بیوگرافی گلشیفته بیوگرافی هیپ هاپولوژیست بیوگرافی سارن بیوگرافی آدام مرادی بیوگرافی محمد هلاکویی بیوگرافی علی حسنی سایت رسمی علی حسنی بیوگرافی ساسی خواننده بیوگرافی ابی باربد معصومی حسینی فایننس بیوگرافی امیرحسین نام آور بیوگرافی امین فردین بیوگرافی فرزاد وجیهی سایت سیب بت سایت jetbet آدرس جدید بت فوروارد وان ایکس بت سایت abt90 بازی انفجار سایت شرط بندی فاز بت بهترین سایت شرط بندی انفجار ورود به آلپاری آلپاری فارکس آدرس بروکر آلپاری بدون فیلتر ثبت نام در بروکر آلپاری فارسی صرافی کوکوین ربات فارکس بهترین سایت تتر

alexistogel toto online

bandar alexistogel

alexistogel bandar gacor

alexistogel link

alexistogel online

alexistogel bandar togel

link alternatif alexistogel

alexistogel

alexistogel

alexistogel

alexistogel daftar

alexistogel toto macau

alexistogel bandar macau

alexistogel slot

alexistogel agen slot

alexistogel

situs alexistogel

alexistogel

alexistogel slot

alexistogel

alexistogel

alexistogel

alexistogel bandar slot

alexistogel

Alexistogel Toto Macau

alexistogel

bandar alexistogel

alexistogel slot

alexistogel link alternatif

alexistogel macau

alexistogel

alexistogel toto macau

slot alexistogel

alexistogel bandar togel

alexistogel

alexistogel rtp

alexistogel

alexistogel slot

alexistogel

alexistogel

alexistogel

alexistogel terpercaya

daftar alexistogel

alexistogel online

rtp alexistogel

alexistogel slot

alexistogel gacor

link alternatif alexistogel

alexistogel login

alexistogel

alexistogel slot dana

agen togel online

bandar togel online

alexistogel rtp

alexistogel slot

alexistogel daftar

alexistogel daftar

slot online dana

bandar togel slot

togel online terpercaya

slot pragmatic gacor

link situs slot resmi

situs slot online

link daftar togel slot

bandar slot gacor hari ini

bocoran pola slot

situs slot online

bandar slot online

bandar togel online

slot online terpercaya

togel slot online

slot deposit qris

agen slot online gacor

rtp live slot online

bandar slot online

bandar slot online gacor

agen slot online

daftar bandar togel slot

bandar togel online

togel slot hari ini

link alternatif togel slot

rtp slot online gacor

slot online gacor

situs slot gacor

rtp slot gacor

slot online gacor

tips slot maxwin

togel slot gacor

prediksi togel

game slot gacor

trik slot online

prediksi togel jitu

game slot online

togel online terpercaya

daftar togel slot online

bandar togel terpercaya

slot online gacor

trik slot bonus

prediksi togel online

rtp slot online

panduan togel online

RTP LIVE

Bandar Toto Macau

Situs Slot Gacor

bandarbola855 resmi

bandarbola855 gacor

bandarbola855 slot

link bandarbola855

bandarbola855 bola slot

bandarbola855 rtp

bandarbola855 slot online

bandarbola855 link

bandarbola855 bandar

bandarbola855 slot terpercaya

bandarbola855

bandarbola855 slot

bandarbola855 terpercaya

bandarbola855 online

slot bandarbola855

bandarbola855 slot

bandarbola855 daftar

bandarbola855 link

bandarbola855

bandarbola855

bandarbola855

bandarbola855 slot

bandarbola855

bandarbola855 rtp

bandarbola855

bandarbola855

bandarbola855

iosbet

iosbet

link iosbet

slot online iosbet

iosbet link login

slot iosbet

iosbet gacor

iosbet slot

iosbet

slot iosbet

agen iosbet

bandar iosbet

iosbet

iosbet link

bandar iosbet gacor

iosbet

iosbet

iosbet

iosbet

liatogel

bandar liatogel

login liatogel

live draw hk liatogel

liatogel slot online gacor

liatogel totomacau

liatogel link

slot gacor

daftar slot online

bandar slot dana

slot ovo

slot gopay