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Using Credit Spreads

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Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

One way to short premium is through the use of vertical spreads. This is a position that uses both long and short options across a range of strikes.

In this segment Tom and Tony address what we need to know about vertical spreads, specifically addressing spreads that are traded for a credit.

Here are a few basic guidelines:

  • Collect minimum credit equal to about ⅓ of the width of the strikes
  • Use OTM options
  • The short strike is closer to-the-money
  • If the credit is not high enough, consider alternate strategies

If you have a tastybite account or are just looking to review the mechanics of credit vertical spreads, check out this segment!

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