How to Credit Spread?

A credit spread involves selling, or writing, a high-premium option and simultaneously buying a lower premium option. The premium received from the written option is greater than the premium paid for the long option, resulting in a premium credited into the trader or investor's account when the position is opened.

Can you lose money on a credit spread?

Spreads can lower your risk substantially if the stock moves dramatically against you. The margin requirement for credit spreads is substantially lower than for uncovered options. It is not possible to lose more money than the margin requirement held in your account at the time the position is established.

How do you make money on credit spreads?

The goal of the credit spread is to produce a net credit. That's your income. You cannot make any more money than the credit you bring in. The credit is produced because the premium you pay when you purchase the option is lower than the premium you receive when the option is sold.