THE CREDIT SPREAD
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The credit spread can be a way to write options with limited
risk. There are two types of credit spreads, but all of them put
cash or a credit in your account.
To design a basic credit spread, do and understand the following:
1. Select an option you wish to write, i.e. PFE Jan 40 call at
2.
2. Select an option further out-of-the-money to buy, i.e.
PFE Jan 45 call at 1.
3. The difference between the two prices is the credit that
you receive, i.e. 2 – 1=1; credit of 1.
4. Your maximum risk is the difference between the strike
prices, i.e. 45 – 40=5; maximum risk is 5 points, less the
credit you receive; 5 – 1=4 points is your maximum risk.
The credit spread can be a way to write options with limited
risk. There are two types of credit spreads, but all of them put
cash or a credit in your account.
To design a basic credit spread, do and understand the following:
1. Select an option you wish to write, i.e. PFE Jan 40 call at
2.
2. Select an option further out-of-the-money to buy, i.e.
PFE Jan 45 call at 1.
3. The difference between the two prices is the credit that
you receive, i.e. 2 – 1=1; credit of 1.
4. Your maximum risk is the difference between the strike
prices, i.e. 45 – 40=5; maximum risk is 5 points, less the
credit you receive; 5 – 1=4 points is your maximum risk.