Credit spread trading strategy.

How it works

Put and call credit spreads

A credit spread pairs an option sold for premium with an option bought for protection at another strike and the same expiration. The position opens for a net credit. Its maximum gain is that credit; its maximum loss at expiration is the distance between the strikes minus the credit, before transaction costs.

Bull put credit spread strategy

A bull put spread sells a put and buys a lower-strike put. It generally benefits when the underlying stays above the short put strike. The purchased put limits downside exposure while both legs remain in place.

Bear call credit spread strategy

A bear call spread sells a call and buys a higher-strike call. It generally benefits when the underlying stays below the short call strike. The purchased call limits upside exposure while both legs remain in place.

Risk management

Defined risk does not mean no risk.

Credit spread risk management starts with the spread width, credit received, position size, and the distance between the short strike and the market. A move through the short strike can turn a premium receipt into a loss. Closing one leg or short-option assignment can change the position's risk profile. The maximum-loss figure above describes an intact spread at expiration, not every possible interim account outcome.

Unlike the wheel programs, which emphasize managing positions and collecting premium over time, the Credit Spreads program focuses on risk-defined boundaries for each spread.

If you are comparing this service with a fund, read our guide to income ETFs and options trade alerts.

For independent explanations, see the Options Industry Council's guides to bull put spreads and bear call spreads.

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