Advantages of using a credit spread

A credit spread is the strategy that involves the sale and purchase of puts simultaneously and these puts expire at the same time having different strike prices. The goal of this strategy is to sell an option that is near the money while buying an option that is far from the money for protection. The result you get is that both options would expire letting you as the trader pocket the net credit that you received.

In this type of strategy time decay will work in your favor as the credit spread holder. This is because as the options approach its expiration, time decay erodes the option premium.

Jocelynn Drake says that this allows you to benefit from a wide range of outcomes – even if the market moves in the wrong direction. The losses of credit spread are gapped at the difference between strike prices of the options played less the premium collected for put options plus the premium collected for call options.

One more advantage is that there are no commission costs when you close your successful credit spreads. Since both options would expire worthless, there are no further actions that are to be required of you as the credit spread player.