Call Credit Spread

Note: This involves Risk
You Could Lose Money

I noticed more mentions of Call Credit Spread’s on the TF and I thought I try and make a guide which is mostly copy and pasted.

Please consider discuss any potential Credit Spread’s on the forum or with @TheHouse , @The_Ni , @Kryptek or the other gods before jumping in. - In the past I have seen these break and destroy ports and traders. Always utilize the knowledge and resources we have here, before going in blind. - I am sure some others a bit more familiar could add quite a bit here.

For the Inverse please search - “Put Credit Spread” (more in depth info there)

This is a spread where you are bearish instead of bullish, and so you sell a call instead of a put. Selling naked calls can be very dangerous because your potential downside is infinite if the stock runs up, and so that’s why this call credit spread includes a protective call to limit that downside risk.

The nuts and bolts of the strategy:

  1. Sell a call (naked or covered)
  2. Buy a cheaper call

Similar to the put credit spread, the trader here wins if the stock remains flat. Being a bearish strategy, you also win if the stock goes down. In either case (down or even), you essentially keep your premium and that’s your max gain (if the sold call expires worthless).

Like the put credit spread, you can choose your downside limit by where you set your protective call– too much protection means small profits, and too little protection allows you to keep more of the short call premium.

Also like the put credit spread, this strategy has 2 additional potential pitfalls: getting greedy and not setting a profit target (and getting wiped out by gamma), or not doing due diligence on a stock and getting crushed the wrong way (in this case, thinking bearish on a stock that’s actually a great company with great catalysts moving forward).