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.

Credit spreads and the bull put spread

When it comes to the stock market, beginners usually explore and focus on debit spreads and never gives a look towards credit spreads. But when you look at their differences, you can tell that it is easier to make profit with the latter.

A debit spread is an options spread wherein the difference between the short and long option’s premiums would result into a net debit. For credit spread, the value of the short position will always exceed the long positions. This means that you can get maximum profit upfront with credit spreads. All you have to do as a trader is to find ways to keep all or at least a significant portion of the profit.

One of the most popular combinations that you can use with credit spreads is the bull put spread. You can use the bull put spread to produce income or to build wealth.

In this position, you purchase a lower strike put and then sell a higher strike put that has the same expiration date. In this spread, the maximum risk will be limited to the difference in the strike price times 100 minus the net credit. Therefore, you instantly know how much you could lose. The maximum profit that you are able to gain will be determined by the net credit you receive when the market closes  at a position above the short put option and the break even point is positioned higher than the put strike price minus the net credit that you receive.