Credit Spread Options: A Limited Risk, Limited Reward Strategy

The credit spread option is essentially a limited gain, limited risk strategy that seeks to profit by selling options. For call options one would sell the low strike price option and buy the higher strike priced option. Hence, the spread will be net credit.

In other words, at the outset of the position the account will collect premium with the intention of profiting by a sideways market or a bull market, having neither preference. This is a premium collection strategy with limited risk as opposed to selling naked options with unlimited risk.

This options strategy is ideal for people who are invested in markets that have reached a cyclical or seasonal low. This allows the net credit spread to receive richer premiums with balanced risk as opposed to risking more in times of market peaks.

Once the options reach time of delivery (expiration), the premium that was collected at the outset, will be retained but no more profit can be achieved no matter how high the market goes up.

Ideally, one should use the strategy with less than six weeks left until expiration, that way the investor can take advantage of the rapid time value decay of the options.