Unit 1 · Level 2 · Vertical spreads
Credit spreads
League 1 warned you about naked short options: sell a put alone and a crash can vaporise your account. A credit spread keeps the premium income but adds a net: sell the €95 put, buy the €90 put. You pocket the difference in premiums up front, and if the stock collapses to €40, your long put catches the fall at €90. Worst case is written on the ticket before you click.
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What you get asked
What job does the long leg do in a credit spread?
The long leg is insurance you buy with part of your premium. It costs you some credit, and in exchange your max loss becomes a fixed, known number.
You sell the €95 put and buy the €90 put for a net credit of €1.50. Width is €5. What is your maximum loss per share, in €?
Max loss = width − credit = €5 − €1.50 = €3.50 per share. Know this number before you open the trade, not after the stock gaps down.
Match each credit-spread number to what it means
Four numbers, all known at entry. That's the appeal of defined-risk selling: no surprises, just a probability bet with fixed stakes.
A put credit spread earns its full profit when both options expire ___.
You sold the spread, so you want it to die quietly. Stock stays above the short strike, both puts expire worthless, and the credit is yours to keep.
Why might a trader sell a put SPREAD instead of a naked put?
You give up some credit to buy the long leg, but you can size the trade properly. The 1% rule from the Trading course only works when max loss is actually defined. 🐜
The rest of this unit
Trade some upside for a hard ceiling on loss. It's the spread trader's first tool.