What Are Call Credit Spreads And How To Profit?

Call credit spreads are a type of options trading strategy that involves selling a call option with a lower strike price and buying a call option with a higher strike price. This strategy is used by options traders who are bearish on the underlying security and expect it to decline in price.

The call credit spread is also known as a bull call spread or a short call spread. This strategy involves selling an out-of-the-money call option and buying a further out-of-the-money call option, both with the same expiration date. The difference in the premiums received from selling the call option and the premium paid for the call option that was bought creates a net credit, hence the name “call credit spread.”

The main goal of the call credit spread strategy is to profit from the difference in the premiums received and paid. The maximum profit potential for a call credit spread is the net credit received when the position is opened. The maximum loss potential, on the other hand, is the difference between the strike prices plus the net credit received.

Image from Options Bros

For example, suppose an options trader sells a call option with a strike price of $50 and receives a premium of $1. They then buy a call option with a strike price of $55 for a premium of $0.50. The net credit received from this trade is $0.50, which is the maximum profit potential for the trade.

If the underlying stock price stays below the $50 strike price at expiration, both options will expire worthless, and the trader will keep the net credit received as profit. If the stock price rises above the $55 strike price, the trader will be obligated to sell the stock at the $50 strike price and buy it at the $55 strike price, resulting in a loss equal to the difference between the strike prices plus the net credit received.

The call credit spread strategy is popular among options traders because it limits the potential loss that can be incurred. Since the strategy involves selling an option with a lower strike price and buying an option with a higher strike price, the net credit received can be used to offset the margin requirement, making it a more capital-efficient strategy.

Call credit spreads can be used in a variety of market conditions. They are most effective in markets that are range-bound or trending downwards, where the trader expects the underlying security to decline in price but wants to limit their downside risk.

Call Credit Spreads, on average depending on the delta you use, have a 70–80% win rate! However, you can increase that win rate to 90% when you trade in the direction of the trend. This means only putting on a call credit spread if the market is trending down or projected to move down based on simple technical indicators.

This image is from the results a put credit spread strategy taught in 10% Credit Spreads Inner Circle

One important consideration when trading call credit spreads is the implied volatility of the options being traded. Implied volatility is a measure of the expected price movement of the underlying security, and it can have a significant impact on the price of options. When implied volatility is high, options premiums tend to be higher as well, which can make the call credit spread strategy more profitable. On the other hand, when implied volatility is low, options premiums tend to be lower, making the strategy less profitable.

Another consideration is the expiration date of the options being traded. Call credit spreads are typically short-term trades, with options expiring in a matter of weeks or months. As the expiration date approaches, the time value of the options decreases, which can impact the profitability of the strategy. Traders should be aware of the expiration dates of the options being traded and be prepared to close out their positions before expiration if necessary.

In addition, it is important to monitor the underlying security and adjust the position as necessary. If the stock price rises above the higher strike price of the call credit spread, the trader may need to close out the position or adjust it to limit their potential losses. Similarly, if the stock price falls significantly, the trader may need to adjust the position to take profits or limit their potential losses.

Get Started With Options Auto Trader Today!

Ready to automate your trading strategy? Start your 30 day trial to the Options Auto Trader and get access to our automation software, best bots, and all my options trading courses for free as a bonus!

Grab my newest book “Never Worry About Volatility Again” for FREE. This book will help you prevent against having one huge loss that wipes out months of profits. Grab your FREE copy here: https://learn.optionsautotrader.com/volatility

Thanks for reading 🙂
Austin Bouley
CEO & Chief Strategy Officer