1. What is an Option Credit Spread?

An option credit spread is an options trading strategy where you simultaneously buy and sell options of the same class (puts or calls) on the same underlying security with the same expiration date but different strike prices, resulting in a net credit to your account.

2. How Does the Calculator Work?

The calculator uses the simple formula:

Where:

• \( Sell\ Premium \) — Premium received from selling the option
• \( Buy\ Premium \) — Premium paid for buying the option

Explanation: A positive result means you receive a net credit (money is added to your account), while a negative result means you have a net debit.

3. Importance of Credit Calculation

Details: Calculating the exact credit helps traders determine the maximum potential profit, risk/reward ratio, and probability of profit for the strategy.

4. Using the Calculator

Tips: Enter the premiums in USD. The sell premium is typically higher than the buy premium in credit spreads. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between credit and debit spreads?
A: Credit spreads result in net premium received, while debit spreads result in net premium paid.

Q2: What are common credit spread strategies?
A: Popular credit spreads include bull put spreads, bear call spreads, and iron condors.

Q3: What is the maximum profit in a credit spread?
A: The maximum profit is the net credit received, achieved if both options expire worthless.

Q4: What is the maximum risk in a credit spread?
A: Maximum risk is the difference between strike prices minus the credit received.

Q5: When should I use credit spreads?
A: Credit spreads are ideal when you expect moderate price movement or range-bound markets.