Credit spreads are one of the most powerful strategies in options trading—especially if you’re looking for consistent returns without taking outsized risk. I’ve used them for decades, both on the trading floor and in my current auto-trading service, and they continue to be a core part of how I trade SPX weekly options.
In this guide, I’ll break down credit spreads in plain English: how they work, when to use them, how to calculate the numbers, and—most importantly—how to manage the risk. I’ll also walk you through a real SPX example I use regularly in the Weekly Trend strategy.
What Is a Credit Spread in Options Trading?
A credit spread is an options strategy where you sell one option and buy another with the same expiration date but a different strike price. Because the option you sell is worth more than the one you buy, you receive a net credit when entering the trade.
- Bull Put Spread – a bullish strategy using puts
- Bear Call Spread – a bearish strategy using calls
✪ Definition: A credit spread is a defined-risk, income-generating options strategy where you profit from time decay and neutral-to-directional market movement by collecting more premium on a short option than you pay for a long one.
How Does a Credit Spread Work?
When you open a credit spread, you’re taking in premium upfront and hoping the price stays on the favorable side of your short strike. If it does, both options expire worthless—and you keep the full credit.
- Defined risk: You know your worst-case scenario upfront.
- Time decay advantage: Theta works in your favor.
- Flexibility: You can be bullish or bearish depending on the setup.
Think of it like running an insurance business. You collect premiums, and if no claim is made (the stock stays above or below your chosen strike), you keep the money.
Credit Spread Strategy: When and How to Use It
Here’s one of my favorite setups. We run a version of this almost every week on SPX in our Weekly Trend strategy:
Real Example: SPX Bull Put Spread with 1:1 Risk-to-Reward
- Underlying: SPX (S&P 500 Index)
- Outlook: Slightly bullish or neutral
- Strategy: Bull Put Spread
- Strike Width: $5
- Expiration: 7 DTE
- Trade Setup: Sell 5100 Put, Buy 5095 Put
- Net Credit: $2.50
Trade Stats:
- Max Profit: $2.50 (if SPX stays above 5100)
- Max Loss: $2.50 (if SPX falls below 5095)
- Breakeven Point: 5097.50
- Risk-Reward: 1:1
SPX has an upward drift over time, and when using proper timing (e.g., avoiding earnings weeks and trading after Fed events), this setup has historically yielded a 60% win rate.
We’ve backtested this strategy over 13 years of SPX data. With just 2.5% capital at risk per trade, the strategy can average around 100% annualized return, with a max drawdown of only ~20%. At 5% risk per trade, returns can exceed 200% per year. This powers the Weekly Trend service.
Formula and Profit/Loss Calculation
- Net Credit = Premium received – Premium paid
- Max Profit = Net Credit
- Max Loss = Spread Width – Net Credit
- Breakeven = Short Strike – Net Credit (for puts)
When to Use a Credit Spread
I typically deploy put credit spreads:
- During earnings season when there’s a bullish bias
- At large events (FOMC, CPI) that suggest upside
- When technicals show a bottom or strong support level
Risk Management and Adjustments
Common Risks:
- Assignment risk (especially near expiration)
- Gap risk (overnight moves through strike)
- Margin pressure (when over-allocated)
How I Manage It:
Assignment: Trade on SPX (cash-settled, no assignment). For SPY, attach a $0.02 target order at entry and close all positions 2 hours before expiration.
- Gap risk & margin pressure: Risk only 2.5% or 5% per trade with a 1:1 risk/reward ratio. This limits drawdown and avoids leverage stress.
In Weekly Trend, these rules are built into our automated system.
Credit Spread vs Debit Spread
| Feature | Credit Spread | Debit Spread |
|---|---|---|
| Entry Cost | Receive premium | Pay premium |
| Time Decay | Helps | Hurts |
| Max Profit | Net credit | Spread width – debit |
| Market Bias | Neutral-to-directional | Directional |
| Risk/Reward | 1:1 or better win rate | Higher reward potential |
Common Questions About Credit Spreads
Can I lose more than my initial credit?
Yes, but only up to the defined spread width minus the credit. Losses are capped.
Is a credit spread bullish or bearish?
Both—bull put spreads are bullish, bear call spreads are bearish.
Should I hold until expiration or close early?
For SPX, you can hold to expiration. For SPY, close at your $0.02 target or 2 hours before expiration. In Weekly Trend, this is handled automatically.
Can beginners trade credit spreads?
Yes. With automation and small sizing, it’s an ideal strategy for learning defined-risk income trading.
Credit Spreads in Bonds: Quick Comparison
In bonds, a “credit spread” refers to the yield difference between a corporate bond and a government bond of the same maturity. The wider the spread, the more credit risk is priced in.
Best Tools to Trade Credit Spreads
- Platforms: Thinkorswim, Tastytrade, Interactive Brokers
- Tools: OptionStrat, POP calculators, trade probability models
- Automation: Advanced AutoTrades integrates with IB and Tradier to auto-execute Weekly Trend signals
Conclusion
Credit spreads offer what most strategies can’t: a balance of risk, reward, and statistical edge. Whether you want weekly cash flow or structured compounding, credit spreads provide a professional framework.
👉 Ready to automate high-probability SPX trades with a 60% win rate and only ~20% historical drawdown?
Explore our Weekly Trend service—built for long-term growth with institutional logic.
Prefer slower-paced setups? Check out our Monthly Trend strategy.
