What is a Credit Spread Options Strategy in Derivative Trading?
- 6th February 2026
- 04:15 PM
- 8 min read
A credit spread strategy refers to buying and selling call or put options using the same underlying asset and expiry date. Almost 11 million people traded equity futures and options contracts in the financial year 2024-25.
As the volume of options trading is increasing day by day, traders are increasingly adopting a wide variety of options trading strategies. Let us understand what a credit spread options strategy is in more detail.
How Does a Credit Spread Options Strategy Work?
A credit spread options strategy capitalises on the changes in the difference or spread between the premiums of two related options. One option has a higher strike price, and another one has a lower strike price, for the same underlying asset.
Traders use these strategies to manage risk, generate income, or hedge against volatility. A bullish credit spread earns a premium when the market remains above a particular level, while a bearish credit spread makes a profit if the market stays below a particular price.
The buyer and seller of a credit spread option make a profit based on whether the spread between the option prices narrows or widens with market movement.
These strategies enable traders to understand risk and reward accurately. These make them practical tools for managing exposure in equity and index options without the need for high capital in outright positions.
What are the Different Types of Credit Spread Strategies?
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Call Credit Spread Strategy
Rather than choosing an uncovered call option, you can use a call credit spread to minimise risks. The mechanics of a credit call spread are almost the same as those of a put credit spread.
Establishing a credit call spread refers to selling a call option with a comparatively lower strike price and simultaneously purchasing a call option on the same underlying asset with a higher strike price.
Again, the premium received from the option sold is greater than the premium paid for the option purchased. This results in a net credit.
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Put Credit Spread Strategy
You can use the credit put spread strategy in place of the uncovered put strategy. The uncovered put is a bullish strategy when you predict the underlying security can move upwards. A vertical credit put spread strategy involves buying and selling two put options of the same underlying securities and expiry dates but with different strike prices.
When you create a bullish position, the premium you pay for buying an option is less than the amount you received for selling the contract.
A put credit strategy helps you generate profit or reduce loss in different market conditions. The maximum loss value cannot exceed the strike price difference between the two options.
Credit Spread Options Strategy Example
Let us understand the credit spread option strategy with two examples.
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Call Credit Spread Strategy
If the stock price of company ABC is currently running at INR 70. You sell 6 ABC call options with a strike price of INR 70, and earn INR 3 per contract, and simultaneously buy 6 ABC call options with a strike price of INR 76, which costs around INR 1 per contract.
If each contract includes 100 shares, the net credit will be:
(3 x 100 x 6) – (1 x 100 x 6)
INR 1800 received – INR 600 paid = INR 1200
You will achieve a profit if ABC’s market price is below INR 72 at expiration. However, you will face a loss if the price surpasses INR 71, with the maximum possible loss being INR 2,400 if ABC closes at INR 76 or higher at expiry.
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Put Credit Spread Strategy
Imagine company ABC’s stock is trading at INR 70. You sell 8 ABC puts for INR 70 strike price for INR 2 per contract and purchase 8 ABC puts with a strike price of INR 70 for INR 1 per contract.
If each contract includes 100 shares, the net credit will be:
(2 x 100 x 8) – (1 x 100 x 8)
INR 1600 received – INR 800 paid = INR 800
You can get this by calculating the difference between the premium you get from selling 8 contracts, which is INR 2 per contract and the premium you pay for purchasing 8 contracts, which is INR 1 per contract, with each contract representing 100 shares.
You will profit if the market price of ABC closes above INR 70 at expiration. If the price of ABC falls below the breakeven point of INR 69, you will incur losses, with the maximum potential loss capped at INR 4,000 if ABC closes at or below INR 64 when the options expire.
What are the Advantages and Disadvantages of Credit Spreads?
Advantages of Credit Spreads
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Less Risky
A credit spread is a limited risk strategy since your risk is limited in this strategy to the difference between the strike prices minus the premium.
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Versatality
Using this strategy, you can trade credit spreads in bull, bear, or neutral market conditions. This allows you to personalise the strategy to their different market views.
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Profit from Time Decay
You can generate profit from the time decay using credit spreads, as long options lose their value as the expiration date comes closer. Using this strategy, sellers can capitalise on this by getting premiums upfront and allowing time to erode the sold option’s value.
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Lower Capital Requirement
Credit spreads are created by selling one option and buying another. As a result, they typically need less upfront capital compared to straight long or short positions in the underlying asset.
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Lower Volatility
Credit spreads can be created with both long and short trades. This means the overall volatility exposure can be lowered, which can provide ease in uncertain economic conditions.
Disadvantages of Credit Spreads
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Limited Profitability
The maximum profit you will get from a credit spread depends on the net premium received, which is comparatively smaller than other strategies. This limited reward might not always justify the risk taken.
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Impact of Volatility
Sudden market movements or high volatility can cause the strategy to fail. A sharp price movement in either direction may lead to significant losses.
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Risk of Losses
If the underlying asset’s price moves significantly against the position, the maximum loss can occur. This can occur when the price of the asset surpasses the long option’s strike price. This forces the trader to bear a loss which is equal to the difference between the two strike prices and the premium received.
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Missed Opportunities
Credit spreads limit the potential to generate profit. This means that in strong trending markets, you can miss out on gains by not capturing the full price movement.
Final Thoughts
You should learn the credit spread strategy to enjoy the benefits like time decay, lower volatility, and versatility. The call credit spread and put credit spread strategies can help you generate profits with the hope that the option prices will fall over time.
Do you want to trade in derivatives? Download the PL Capital Group – Prabhudas Lilladher application and open a trading account. PL has also tied up with prominent partners in the industry to help you analyse and trade smartly.
Frequently Asked Questions
1. What is a Credit Spread Option Strategy?
A credit spread strategy refers to selling one option and purchasing another with the same expiration date but with different strike prices, which creates a net credit. It helps to generate profit from premiums and minimises risk. You can use it for stable returns when expecting lower market movement.
2. How can you make a profit from credit spreads?
You can make a profit from credit spreads when they remain narrow between options.
3. Which is better, a credit call spread or a credit put spread?
Both the credit call spread and a credit put spread are helpful strategies. However, none of them is inherently better than the other one. Your choice depends entirely on your market viewpoint and risk tolerance.
4. Are credit spreads useful for beginners?
Yes, beginners can benefit from credit spreads since they are effective options strategies which help to manage risks very easily.
