Mechanics of the Trade - Credit Spread

The basic goal of an income trade is to generate a net credit to the account through a credit Spread. Credit Spread - The simultaneous sale of one option and purchase of another option that results in a credit to the investor's account. Thus, more funds are received from the sale than are required for the purchase. An option credit spread example would be buying a Jan 50 call on ABC for $2 and writing/selling a Jan 45 call on ABC for $5. The net amount received (credit) is $3. The investor will profit if the spread narrows or if ABC never gets pass 45 

In the example above we initiate a credit spread on Red Hat (RHT) -  We sell the December 45 Call and Buy the December 50 call for a net credit of .67 cents, we sell 10 contracts so we take in a total premium of $670. As long as RHT does not go beyond 45 by December we keep all the premium that we took in.


Just like we did above for calls we can initiate a credit spread for Puts as well.