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Credit Spread Examples

Bear Call Credit Spread

This strategy is to realize a profit by making cash that is a net credit formed by the difference in a SOLD CALL price and a BOUGHT CALL price. While the stock goes down, the investor keeps the net credit (difference in premiums).

  • SELL a CALL at or out of the money (lower strike price).
  • BUY a CALL one or more strikes above #1 CALL in the same month, this provides the upside safety.
  • The margin requirement is the difference between the strike prices, usually 5 points/dollars.
  • The maximum risk is the difference between the strike prices, less the net credit (difference in premiums).
  •  The maximum profit is the net credit (difference in premiums).
  • The break even point is the lower strike price (#1) plus the net credit.
  • Profit is realized when the stock price falls below this number.
  • Maximum profit is made when the stock price falls below the lower strike price (#1 CALL).
  • A profit is realized at any stock price between the break even point and the net credit.

Advantages of this strategy:

  • This is a BEARISH strategy, the profit can only be realized when the stock price falls from current price to a number between the break even point and net credit.
  • If the stock goes very low gains are limited to the net credit.
  • Losses are limited to the difference in strike prices, usually about 5 points minus the net credit.
  • Risk can be controlled by how far out of the money the sold option is positioned. Further OTM spreads will yield less profit, but are safer and have a higher break even point.
  • In the face of a rise the investor can buy back the SOLD CALL and have unlimited profit from BOUGHT CALL.
  • Highly leveraged because of the low margin requirement on the spread.
  • This is an option only strategy, no shares of stock are actually owned. (uncovered position).

Bull Put Credit Spread

The reverse of a Bear Call Credit spread. The difference is that the trade consists of buying and selling Put options.

This strategy is to realize a profit by making cash that is a net credit formed by the difference in a SOLD PUT price and a BOUGHT PUT price. While the stock goes up, the investor keeps the net credit (difference in premiums).

  • SELL a PUT at or near money (higher strike price).
  • BUY a PUT one or more strikes below #1 PUT in the same month, this provides the downside safety.
  • The margin requirement is the difference between the strike prices, usually 5 points/dollars.
  • The maximum risk is the difference between the strike prices, less the net credit (difference in premiums).
  •  The maximum profit is the net credit (difference in premiums).
  • The break even point is the higher strike price (#1) minus the net credit.
  • Profit is realized when the stock price rises above this number.
  • Maximum profit is made when the stock price rises above the higher strike price (#1 PUT).
  • A profit is realized at any stock price between the break even point and the net credit.

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