Credit Spreads, Explained

What it is

You sell one option and buy a cheaper, further out-of-the-money option of the same type and expiry. The option you sell brings in more than the one you buy costs, so you collect a net credit — and the option you bought caps your loss.

Two flavours

• Bull put spread (neutral-to-bullish): sell a put, buy a lower-strike put. Profits if the stock stays up.
• Bear call spread (neutral-to-bearish): sell a call, buy a higher-strike call. Profits if the stock stays down.

The numbers (bull put example)

Stock at $52. You sell the $50 put and buy the $45 put for a net credit of $1.00 ($100). The strikes are $5 apart.

• Max profit: the credit — $100. Kept if the stock is above $50 at expiry.
• Max loss: width minus credit = ($5 − $1) × 100 = $400. That's your worst case, full stop — even if the stock goes to zero.
• Breakeven: $49 (short strike minus credit).

You risk $400 to make $100, with a high probability of keeping the $100. That risk/reward is typical — which is why strike selection and position sizing matter.

Why beginners like them

Defined risk. Unlike a cash-secured put, you know the absolute worst case the moment you open the trade, and it ties up far less capital ($400 vs $5,000).

How TickerRisk helps

Credit spreads shine when options are expensive: screen high IV Rank, confirm a clean Edge Score, and avoid earnings inside the expiry.