Credit spread

A spread you open for a net credit — you receive premium up front and want the options to expire worthless.

A credit spread is an options position where you sell one option and buy another of the same type and expiration, but at a further strike. Because the option you sell is worth more than the one you buy, you collect a net premium up front. That premium is your maximum profit, and the gap between the two strikes minus the premium is your maximum loss. Traders lean on credit spreads when they expect a stock to stay above (or below) a certain level, and they like getting paid to be patient while theta works in their favour.

A simple example: with a stock at $100, you sell the $95 put and buy the $90 put, collecting $1.50. As long as the stock stays above $95 at expiration, you keep the full $150 and both options expire worthless. If it drops to $90 or lower, you lose the difference, $500 minus the $150 you collected, so $350.

The common mistake is being seduced by the high win rate and forgetting the payoff is lopsided: you risk far more than you can make. One breach can wipe out several winning trades, so position size and knowing your max loss before you open matter more than the comfortable feeling of frequent small gains.

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Educational use only. Quotes are delayed ~15 minutes and nothing here is financial advice. Options trading involves substantial risk of loss.