{"id":65636,"date":"2025-11-10T01:00:33","date_gmt":"2025-11-10T06:00:33","guid":{"rendered":"https:\/\/www.tradestation.com\/insights\/?p=65636"},"modified":"2025-11-10T08:28:39","modified_gmt":"2025-11-10T13:28:39","slug":"options-trading-key-points-credit-spreads-2","status":"publish","type":"post","link":"https:\/\/www.tradestation.com\/insights\/2025\/11\/10\/options-trading-key-points-credit-spreads-2\/","title":{"rendered":"Key Points About Selling Credit Spreads"},"content":{"rendered":"<p>A previous post covered\u00a0<a href=\"https:\/\/www.tradestation.com\/insights\/2025\/09\/21\/bullish-bearish-vertical-spreads\/\">debit spreads<\/a>, when you pay a debit looking for a stock or ETF to move in a certain direction. Credit spreads are just the opposite, with traders collecting premium up front in hope that the stock\u00a0<em>won\u2019t move<\/em>\u00a0a certain way.<\/p>\n<h3 class=\"wp-block-heading\">What a Credit Spread Is<\/h3>\n<p>Credit spreads are the mirror image of debit spreads, with each part of the strategy reversed.<\/p>\n<p>A trader would\u00a0<a href=\"https:\/\/www.tradestation.com\/trading-products\/options\/\">sell options<\/a>\u00a0closer to the money, which are worth more. He or she would also buy an equal number of cheaper contracts further from the money. This will result in an upfront credit.<\/p>\n<p>For example, say stock XYZ is at $100 and a trader expects it to move sideways. There might be some chopping up and down, but they don\u2019t see it going under $95.<\/p>\n<p>He or she could:<\/p>\n<ul class=\"wp-block-list\">\n<li>Sell the $95 puts for $2.<\/li>\n<li>Buy the $90 puts for $1.<\/li>\n<\/ul>\n<p>This will generate a net credit of $1 in their account.<\/p>\n<p>Being short the $95 puts, the trader will want them to expire worthless. That will happen as long as stock XYZ remains above the $95 strike price.<\/p>\n<p>So why buy the 90 puts? Those are a hedge against being wrong. They may lower the profit potential but also reduce risk.<\/p>\n<h3 class=\"wp-block-heading\">Create an Edge with Defined Risk<\/h3>\n<p>Remember that put buyers have the\u00a0<em>right\u00a0<\/em>to sell a stock. However put sellers have an\u00a0<em>obligation\u00a0<\/em>to\u00a0buy shares\u00a0if they\u2019re under the strike price. This can turn into a potentially huge liability when a big selloff occurs.<\/p>\n<p>For example in the case above, stock XYZ can hypothetically go to zero. That would create a staggering $95 loss per share in an account. While such declines might be rare, they can happen.<\/p>\n<p>The credit spread mitigates this hazard by owning puts at the lower strike. In the case above, the 90 puts would limit potential losses to $5: Not great \u2014 but not fatal either.<\/p>\n<p>Call credit spreads have a similar structure to the upside: Traders thinking that a stock won\u2019t move higher might sell calls slightly above the current price. They would then buy cheaper calls at a higher strike to hedge against a big rally.<\/p>\n<p>Option spreads consist of long and short option positions. Considering exercise and assignment risk is an important part of any option strategy.<\/p>\n<h3 class=\"wp-block-heading\">Putting Time To Work<\/h3>\n<p>Time decay is the basic principle of credit spreads. We know that out-of-the-money options expire worthless. Credit spreads simply capitalize on this process while hedging to limit risk.<\/p>\n<p>Still, there are some nuances. The pace of time decay accelerates closer to expiration, so it often makes sense to sell put spreads with no more than 2-3 weeks until expiration. This can capture the quickest premium destruction. (Which helps traders who are short.)<\/p>\n<p>Second, events like earnings can distort time decay. Instead of premium disappearing at a smooth and predictable rate, it may occur all at once after the news passes. That\u2019s why traders should know companies well before writing credit spreads. It\u2019s important to understand the types of catalysts that can impact share prices.<\/p>\n<h3 class=\"wp-block-heading\">Getting an Edge with Technical Analysis<\/h3>\n<p>Traders are always looking for an edge, or advantage to tilt the odds in their favor.<\/p>\n<p>This is especially true when you\u2019re selling credit spreads because the profits are limited to the income collected up front. You can\u2019t count on a few huge winners to offset losses. Therefore it\u2019s even more important to develop a system for consistently identifying range-bound stocks.<\/p>\n<p>Technical analysis is one of the most common ways to achieve this. Support and resistance levels can influence where a stock moves, and where it stops moving.<\/p>\n<p>Sellers of credit spreads can benefit from these chart patterns. They might sell put spreads when a stock holds a support level or sell a call spread when it hits resistance.<\/p>\n<p>Alternately, indicators like oscillators can help identify when a move is extended and poised for a reversal. This might include using the Relative Strength Index (RSI) or Bollinger Bands. Traders thinking a stock is oversold could sell put spreads, or call spreads if it appears overbought.<\/p>\n<h3 class=\"wp-block-heading\">Beware of Volatility<\/h3>\n<p>While credit spreads include a built-in hedge, it\u2019s also important to realize that they often work better at times of calm. When volatility slams the entire market, certain patterns stop working. Support levels don\u2019t hold and ranges widen. This can change expected likelihoods and expected ranges, reducing the effectiveness of a probability-based trading system.<\/p>\n<p>That\u2019s not an argument against credit spreads. It\u2019s just something to bear in mind.<\/p>\n<p>Remember that the goal is to capture time decay \u2014 not necessarily to short volatility. That requires predictability, which is easier when swings are less extreme.<\/p>\n<hr class=\"wp-block-separator has-alpha-channel-opacity\" \/>\n<p><em>Options trading is not suitable for all investors. Your TradeStation Securities\u2019 account application to trade options will be considered and approved or disapproved based on all relevant factors, including your trading experience. See\u00a0<a href=\"https:\/\/www.theocc.com\/Company-Information\/Documents-and-Archives\/Options-Disclosure-Document\">www.TradeStation.com\/DisclosureOptions<\/a>. Visit\u00a0<a href=\"http:\/\/www.tradestation.com\/Pricing\">www.TradeStation.com\/Pricing<\/a>\u00a0for full details on the costs and fees associated with options.<\/em><\/p>\n<p><em>Margin trading involves risks, and it is important that you fully understand those risks before trading on margin. The Margin Disclosure Statement outlines many of those risks, including that you can lose more funds than you deposit in your margin account; your brokerage firm can force the sale of securities in your account; your brokerage firm can sell your securities without contacting you; and you are not entitled to an extension of time on a margin call. Review the\u00a0Margin Disclosure Statement at\u00a0<a href=\"https:\/\/uploads.tradestation.com\/uploads\/margin-disclosure-statement.pdf\">www.TradeStation.com\/DisclosureMargin<\/a>.<\/em><\/p>\n<p>ID4976374 D1125<\/p>\n","protected":false},"excerpt":{"rendered":"<p>A previous post covered\u00a0debit spreads, when you pay a debit looking for a stock or ETF to move in a certain direction. Credit spreads are just the opposite, with traders collecting premium up front in hope that the stock\u00a0won\u2019t move\u00a0a certain way. What a Credit Spread Is Credit spreads are the mirror image of debit [&hellip;]<\/p>\n","protected":false},"author":39,"featured_media":32906,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","inline_featured_image":false,"footnotes":""},"categories":[77,14],"tags":[],"class_list":["post-65636","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-education","category-options","et-has-post-format-content","et_post_format-et-post-format-standard"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v25.3 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Key Points About Selling Credit Spreads | Market Insights<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.tradestation.com\/insights\/2025\/11\/10\/options-trading-key-points-credit-spreads-2\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Key Points About Selling Credit Spreads | Market Insights\" \/>\n<meta property=\"og:description\" content=\"A previous post covered\u00a0debit spreads, when you pay a debit looking for a stock or ETF to move in a certain direction. Credit spreads are just the opposite, with traders collecting premium up front in hope that the stock\u00a0won\u2019t move\u00a0a certain way. 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