Credit Spread (Options) Explained - Derivatives
In finance, a credit spread (or net credit spread) is an option strategy that involves buying one option and selling another option in the same class. It is designed to make profits when the spread between the two options is narrowed, and investors want that spread to narrow before they run out of profit. The investor must pay to receive the risk premium, but gets the net credits to enter the position. In this context, a narrowing means that the options sold by the trader are in the money at the end of the run, the net premium he receives, in which case the trade is profitable, and the maximum that would be realised before the option premium expires is worthless. A bullish option strategy is used when option traders expect the underlying share price to go up. Moderately bullish option traders usually set a price target for a bull run and use the bull premium to lower costs. Before deciding on the optimal trading strategy, one must estimate how high share prices can rise and in wha...