Definition
A credit spread is an options position made up of two legs of the same type and expiration, in which the option sold carries more premium than the option bought. Because the trader receives more than they pay, the position opens for a net credit.
The credit is the maximum profit. The bought leg is a protective hedge that defines the maximum loss, making the strategy a defined-risk way to collect premium.
Why it matters
How it works
The defining feature of a credit spread is that the trader keeps the premium if the options expire worthless. The bull put spread and the bear call spread are the two common forms: one bets the underlying stays above a level, the other that it stays below. Because a near-the-money short option is hedged by a farther option, the loss can never exceed the gap between the strikes minus the credit. Credit spreads stand in contrast to debit spreads, which pay a premium up front and profit from a favorable price move rather than from decay.