Credit Spread

A credit spread is an options trade made up of two legs — one bought, one sold — where the option you sell is worth more than the option you buy. Because you're selling the pricier leg, money flows into your account the moment the trade is opened, and that upfront cash is the "credit."

Both legs use the same underlying stock or index and usually the same expiration date, just different strike prices. The most you can ever be paid is the credit you collect at the start. The most you can lose is capped too, because the option you bought acts as insurance against the option you sold — that's what separates a credit spread from simply selling a naked option, where losses can keep growing.

The trade-off is that credit spreads are a bet that the underlying will NOT move sharply in one direction, rather than a bet that it will. You profit if the options expire worthless or lose value, letting you keep some or all of the initial credit. If the underlying moves against you, the spread's value rises and you'd need to pay more to close it than you received to open it — that's your loss, bounded by the width between the two strikes minus the credit you took in.

The word "credit" only describes cash flow direction, not whether the trade is bullish or bearish. A credit spread can be built with calls (typically a bet against a big rally) or with puts (typically a bet against a big decline), so the label alone doesn't tell you the market view — you still have to look at which strikes were bought and sold.