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In finance, a credit spread, AKA net credit spread, is the difference in yield between different securities due to different credit quality.
Credit Spread Options
Investors can simultaneously buy or sell more than one option position. A spread involves the purchase of one option and a sale of another option in the same class and expiration. Investors want credit spreads to narrow or expire for profit.
- A credit call spread is a "bearish" call spread, which has more premium on the short call.
- A credit put spread is a "bullish" put spread and has more premium on the short put.
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.
Maximum Potential
The maximum gain and loss potential are the same for call and put spreads. Note that net credit = difference in premiums.
Maximum Gain
Maximum gain = net credit, realized when both options expire.Maximum Loss
Maximum loss = difference in strike prices - net credit.See Also
"Credit spread"