What is a Credit Spread?Credit spreads are made up of two options with two different strike prices. One option strike is bought for a debit, and the other option strike is sold for a credit. This results in a net credit for the spread. Both options are in the same expiration period.
Bear call spreads explainedThe bear call spread is generally used when a decline in the price of the underlying is expected. It is constructed by selling a call option at a specific strike price, while at the same time purchasing the same number of calls at a higher strike price. Below is an example of a bear call spread on ISRG opened 31 days to expiration, with ISRG selling at 832. The bear call spread was opened as follows:
- Sold (5) 865 Calls @ $1.60 credit
- Bought (5) 875 Calls @ $.35 debit