Credit Spread
Credit spread is a term used to describe the direction cash flows when executing a spread trade.
When the simultaneous buying and selling of options results in a cash inflow (credit) to your account, it is a called a credit spread. In other words, the options you buy cost less than the options you sell.
There are many option strategies that can be considered a credit spread. The key is: 1) Concurrently buying and selling two or more different options and 2) An inflow of money at the time the position is opened.
Examples of a credit spread are Bear Call Spread, Bull Put Spread, Iron Butterfly Spread, Iron Condor Spread, Short Strangle, Short Straddle, and Vertical Spreads. When entering a spread order with your broker, you identify any transaction that results in an inflow of cash to your account as a credit spread.
Category: Options Trading Strategies