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What is a Credit Spread Strategy?
By Bajaj Broking Team
November 25, 2025
7 mins read
Futures and Options
A credit spread is a common options trading strategy that pays you up front. You sell one option and buy another of the same type and expiration date, but at a different strike price. The "credit" that goes into your account is the difference between the price of the option you sell and the price of the option you buy.
The main goal of this plan is to make money. You are basically predicting that the price of a stock will stay within a certain range.
There are two main kinds of credit spreads:
Type of Spread | Your Market View | What You Do |
Bull Put Spread | You think the price will stay the same or go up. | You sell one put option and buy another one with a lower strike price. |
Bear Call Spread | You think the price will stay the same or go down. | You sell one call option and buy another one with a higher strike price. |
Here are the most important things to remember about this strategy:
The most money you can make is the amount of credit you start with.
You also know from the start what your maximum loss will be.
Traders who want to make steady money while keeping their risk low often use this method.
How Credit Spread Strategies Work
Credit spread strategies work by using the difference in option premiums to their advantage. When you set up a credit spread, you buy a less expensive option and sell a more expensive one at the same time. The difference in their prices right away is your "net credit," or the money you make right away.
The goal is for both options to lose value as they get closer to the date they expire. You want both options to expire without any value. If that happens, you don't have to do anything else, and you get to keep the whole credit you got at the start as your final profit. You can make money with this strategy even if the stock price stays the same.
Formula For Calculating Credit Spread
These are the easy ways to figure out how much money you could make or lose with the two most common types of credit spreads.
Bull Put Spread:
The most money you can make is the net credit you get.
Maximum Loss = (Difference Between Strike Prices) – Net Credit Received
Bear Call Spread:
The most money you can make is the net credit you get.
Maximum Loss = (Difference Between Strike Prices) – Net Credit Received
Who Should Consider Using Credit Spread Strategies?
Some traders, especially those with specific goals in mind, may find that credit spreads work well for them. You might want to think about using them if you are:
An investor who wants to make money on a regular basis: This plan is a great way to make money from option premiums on a regular basis.
A trader who wants to lower their risk: Before you even start trading, you'll always know how much you could lose at most.
A person who believes the market will stay the same: These strategies are great for making money when you don't expect prices to move a lot.
A trader with a smaller account: Credit spreads usually need less money (margin) than other option strategies.
A trader who knows a lot about options: It's not just for experts, but it helps a lot to know how options work.
Also Read: Option Volatility and Pricing Strategies
Risks and Benefits of Using a Credit Spread Strategy
There are both pros and cons to using a credit spread strategy, and it's important to know them all before you use this trading method:
Benefits:
Limited Risk: One of the best things about credit spreads is that they have a clear maximum loss potential. Traders know how much they can lose at most, which helps them manage risk.
Making Money: Credit spreads are a way to make money. When traders sell options, they get premiums, and as long as the market acts as expected, they can make money all the time.
Market Flexibility: Credit spreads can be set up to make money in a variety of market situations. They can be bullish (bull put spreads), bearish (bear call spreads), or even neutral, which gives them the ability to adapt to changing market conditions.
Lower Margin Requirements: Compared to other option strategies, credit spreads usually require less margin, which makes them available to traders with less money.
Time Decay Benefit: Credit spreads often benefit from options losing value over time, which is also called theta decay. As time goes on, the options lose value, which can help credit spread positions.
Risks:
Limited Profit Potential: Just like your losses are capped, your potential profits are too. No matter how much the stock moves in your favour, your maximum gain is the first credit you got.
The Stock Price Goes the Wrong Way: If the stock price goes sharply against your position, you will lose money. The loss is limited, but it can still be big if you don't handle the trade well.
Risk of Early Assignment: There is a small chance that the option you sold could be assigned before the end of the contract. This could mean that you have to buy or sell the stock before you're ready, which can make things more difficult for you.
It Can Be Hard: Credit spreads aren't for people who are just starting out. To handle options well, you need to know a lot about how they work, including the "Greeks" (delta, theta, etc.).
Also Read: Futures Pricing
Ideal Situations To Use A Credit Spread Strategy
Not all market conditions are good for credit spreads. They work best when you know exactly what you want the market to do (or not do). You can improve your chances of success by making sure that your strategy fits the market environment.
These are some of the times one should use a credit spread strategy:
If you think the market will be calm or go sideways: Credit spreads make money as time goes on. If the stock price stays in a narrow range, the options you sold will lose value, and you can keep the profit.
If you want to make a steady income: If you want a steady income from the markets, selling credit spreads can be a great way to do it. You can get premiums from your trades on a regular basis.
When You Don't Know Which Way the Market Is Going: You can set up a neutral credit spread that will make money as long as the price doesn't move too much if you're not sure if the market will go up or down.
When Implied Volatility is High: When implied volatility is high, it's often a good idea to sell options because the premiums are higher. You can take advantage of this by selling that expensive premium with a credit spread.
Conclusion
In conclusion, a credit spread strategy can make money and limit risk, so it can work in a variety of market conditions, especially when the market isn't moving much or is going sideways. But when a credit spread strategy doesn't work, it's very important to have a clear plan. This means looking at the position, thinking about making changes or placing stop-loss orders, and using what you learnt to make better trading decisions in the future. One of the most important things to do when trading is to spread your investments out, manage your risks, and keep your emotions in check. There are always risks involved in trading, but if you stay disciplined and keep working on your skills, you can better handle the complicated nature of the financial markets.
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