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A credit spread is an option spread strategy in which the premiums received from the short leg(s) of the spread is greater than the premiums paid for the long leg(s), resulting in funds being credited into the option trader's account when the position is entered.
The net credit received is also the maximum profit attainable when implementing the credit spread option strategy.
Vertical Credit Spreads
Bull Credit Spread
Bear Credit Spread
Non-directional Credit Spread Combinations
Spreads can be combined to create multi-legged, credit spread combinations that are employed by the option trader who does not know or does not care which way the price of the underlying security is headed but instead, is more interested in betting on the volatility (or lack thereof) of the underlying asset.
Bullish on Volatility
If the option trader expects the price of the underlying security to swing wildly in the near future, he can choose to implement one of the following spread combination strategies on a net credit.
Bearish on Volatility
If instead, the option trader expects the price of the underlying security to remain steady in the near term, he can choose to implement one of the following credit spread combination strategies.
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