5.3.3.2 Credit Call Spread
If you want to take in income and do not expect much volatility in the stock, but you want to cap your risk, you can create a credit call spread. Here is an example:
Short XYZ Sept 40 call @ 4
Long XYZ Sept 50 call @ 1
In this case, the spread writer expects the price to decline or go nowhere. An investor who opens this position is bearish, which is why it is sometimes called a bear credit spread. In the example, the spread writer takes in a total of $3 ($4 – $1), which is why it is called a credit spread—it creates a credit in the investor’s account. An investor in this credit call spread has the same breakeven as the debit call spread we described previously: the difference between the premiums added to the lower strike price (40 + 3 = 43). The max