Define your risk. Collect your premium.
A credit spread is an options strategy that involves simultaneously buying one option and selling another on the same underlying stock, with the same expiration date but different strike prices. The net result is that you collect a premium upfront — the "credit" — because the option you sell is worth more than the one you buy. The key feature of this strategy is that your maximum possible loss is defined from the start, making it one of the few options approaches where you know your worst-case outcome before you place the trade.
The two most common types are the bull put spread and the bear call spread. In a bull put spread, you sell a put at a higher strike price and buy a put at a lower strike price. You keep the premium if the stock stays above the strike you sold. The bought option acts as a protective floor — it caps your loss if the trade moves against you. The difference between the two strikes represents the maximum risk, and the credit you received up front represents the maximum reward. Both are known before the trade is ever opened.
Credit spreads are a natural next step for options traders who want to generate income with a clearly defined risk profile. They're well-suited for investors who are comfortable with basic options mechanics and want a strategy that doesn't require owning or committing to buy shares outright. Because the maximum loss is capped, they appeal to those who prioritize capital preservation alongside income generation. This strategy tends to work best for traders who have a directional view on a stock or index and want a structured way to express that view with limited downside.
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