What is a credit spread?
A credit spread involves selling an out-of-the-money option and buying a further out-of-the-money option at the same expiration. You collect a net credit (premium) upfront and keep it if the stock stays away from your short strike. A bull put spread (put credit spread) profits when the stock stays above the short put. A bear call spread (call credit spread) profits when the stock stays below the short call.
Why credit spreads are popular
Credit spreads offer defined risk — your max loss is the spread width minus premium collected, no matter how far the stock moves against you. This makes them ideal for accounts where naked options are not allowed, and for traders who want the premium selling edge without unlimited downside. They also require less capital than cash-secured puts.
Choosing spread width
Narrow spreads (1-2 strikes wide) have lower max loss but lower premium. Wide spreads (5-10 strikes wide) collect more premium but risk more. A common approach: use $5-wide spreads on stocks over $100 and $2-wide spreads on stocks under $50. The Return on Capital calculation helps you compare: premium collected divided by max loss gives the true return on your margin.
Strike selection with expected move
Sell the short strike outside the 1σ expected move for approximately 84% probability of profit at expiration. For higher probability, sell outside 1.5σ or 2σ — but collect less premium. The sweet spot for most traders is the 15-20 delta short strike (about 1σ out) with a 70-85% probability of profit. Use the Expected Move Calculator to find exactly where 1σ falls for your DTE.
Put credit spread vs call credit spread
Put credit spreads have a bullish to neutral bias — they profit when the stock stays above the short put. They are the more common choice because stocks tend to drift upward over time. Call credit spreads have a bearish to neutral bias. Many premium sellers favor puts because the market has a natural upward drift and because put premiums tend to be richer due to skew (put buyers pay more for downside protection).
Management rules
Enter at 30-45 DTE. Take profits at 50-75% of max profit — do not hold to expiration for the last few dollars. Close at 1.5-2x the premium received if the trade goes against you. If the stock breaches your short strike before expiration, close immediately rather than hoping for a reversal. A consistent management plan prevents small losers from becoming account-damaging losses.