Credit Spread

What this structure is

A Credit Spread (Credit Spread) has two legs and pays you a net credit: you sell the option closer to the price and buy one further away as protection. Your maximum profit is the credit you took in, and your maximum loss is the gap between the strikes minus that credit. It is a bet that price will not reach a level, not that it will go somewhere.

Its probability logic

You win in two and a half scenarios: the market moves away from the barrier, stays put, or moves a little toward it without reaching it. Time works for you every day (positive theta). The price is an inverted payoff: small, frequent gains and a rare loss that equals several of them. Managing that rare case is the craft.

Its textbook rules

Sold at a known probability distance (delta of the short leg 0.20-0.30 by common convention) · when implied volatility is high (you sell insurance at a high price) · and managed before expiration: close after collecting most of the credit (50-75%) or when the loss doubles · not waiting for the final outcome on every trade.

Hypothetical example

An index at 5900 and a structural put wall at 5800: selling a 5790/5760 put spread for a $8 credit. The bet is that the structural barrier holds for three weeks. It passed quietly and was closed at $2 for a $6 gain: three quarters of the credit, without waiting through the last week's risk.

Common mistake

Selling thin credits with close barriers 'to boost yield': collecting $1 for risking $9 means you must be right 90% of the time just to break even. Do the probability math before selling, not after the first disaster.

Its probability math before selling

Collecting $1 for risking $9 means you must be right 90% of the time just to break even. So work out the percentage before entering, not after the first disaster. A working rule: take an offer that pays a credit of at least a third of the spread width, and close when most of it is captured.

Where to see it on the platform

The spreads calculator works out the credit, the limits and the probabilities. The Gamma dashboard points to the structural barriers the trade is built behind.

The calculator works out the credit, the maximum loss and the probability. The Gamma dashboard points to the structural barriers.