Credit Call Spread

A credit call spread is a vertical spread that involves simultaneously buying and selling two calls on the same underlying with the same expiration. The long call has a strike price higher than the short call. The result is a credit, since the short call will be worth more than the long call. The maximum profit is the premium earned, and will be earned if the stock falls below the long strike. Therefore, this strategy should be used when the investor is bearish on the stock. The maximum risk is the difference in strike prices minus the earned premium. This occurs if the stock rises above the long strike. The breakeven is Short strike + premium.

Example: Revisiting the example from before, with XYZ trading for $34, our investor sells the $35 call for $3, and purchases the $40 call for $1.15. This results in a credit of $185 per contract in her account. If the stock remains below $35 on expiration, she'll keep the entire principal. Her income will be reduced if the stock closes above $35. The breakeven is at $35+$1.85 = $36.85. She'll begin losing money if the stock closes above $36.85