TRIED & TRADED
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What is a credit spread?

  • A credit spread sells one option and buys a cheaper one further out in the same expiry.
  • You are paid to open it, and the option you bought is what caps the loss.

What it is

  • Two legs, one expiry, one underlying.
  • The one you sell is nearer the money — it is worth more, and it is the income.
  • The one you buy is further out — cheaper, and it is the cap.
  • The difference is paid to you on the day you open.

It is a category, not a trade

  • Sell puts below the stock and it is a bull put spread.
  • Sell calls above it and it is a bear call spread.
  • Do both at once and it is an iron condor.
  • Each of those has its own page, because the differences between them are where all the interesting parts live.

What every credit spread has in common

Set by
Maximum profitThe credit. Nothing more, ever
Maximum lossThe width less the credit
BreakevenThe short strike, moved by the credit
TimeWorks for you. Every quiet day pays
VolatilityWorks against you. You are short it
  • You win small and often, and lose large and rarely. That shape is the whole family.
  • It is also the shape most easily mistaken for skill, because a high win rate arrives before the losses do.
  • Which is why this site judges these on expectancy, never on the percentage of trades that won.

The four numbers that specify one

  • Delta — how far out you sell.
  • Tenor — how long you give it.
  • Width — how far apart the two strikes are.
  • Minimum credit — the least you will accept for the risk.
  • Name all four and it is testable. Leave one out and it isn’t.

Where it bites

The maximum loss is the width less the credit. Not the width, and never the credit.

  • A $5-wide spread that pays you $93 can lose $407, not $500 and not $93.
  • That single arithmetic step is the most common sizing error in retail options, and it runs in both directions.
  • It also means a stop quoted as a percentage is a percentage of the credit, not of the risk.

And the width does not travel

  • A $5-wide spread risks roughly the same money whatever the share price is.
  • On a $30 stock that is a large position. On a $600 stock it is a rounding error.
  • A width chosen once and applied everywhere is a default, not a decision — and defaults have a way of ending up in a hundred thousand trades without anyone choosing them.

Common questions

Is a credit spread safer than selling a naked option?

The loss is capped, which the naked version’s is not. It is also smaller per trade in both directions. Safer in the sense that matters most: you can state the worst case before you enter.

Which side should I sell, puts or calls?

They are not mirror images. At the same delta the call sits further from the stock and collects less — the two structure pages compute both.

What width should I use?

There is no universal answer, and anyone giving you one has not thought about the share price. Width is one of the four numbers and belongs in the specification.

Do credit spreads work?

That is the question the site exists to answer, and no result is published yet. What can be said now is that the answer depends as much on the exit as on the entry.

How this shows up in our tests

Three credit-spread tests are written and none has published a result — the bull put spread, the bear call spread and the iron condor.

All three are held up by the same two problems in our own data, and both are recorded rather than quietly worked around. When they clear, this page will link to the verdicts.

Below the stock

The bull put
spread

Above the stock

The bear call
spread

Both at once

The iron
condor