Series 7: 5.3.3.2 Credit Call Spread

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