This results in a net credit. The goal of a credit spread position is to retain this net credit by having both options in the spread expire worthless. This strategy allows investors to achieve both steady rewards and controlled risks. This is accomplished by collecting premium up front and waiting until expiration, when hopefully the positions expire worthless. With credit spreads, the effect of time decay is working for you, not against you.
Credit spreads offer two primary advantages over straight put or call purchases.
If you initiate a bearish credit spread with the sold call option two percent out of the money, you will keep the entire premium if the underlying stock or index moves down, stays flat, or goes up two percent. Only when the sold option slips into the money is your position at risk of losing value. In addition, losses are usually capped at the difference between the strike prices of the options minus the premium collected. This will become clearer in the example below. The second advantage is that no commission costs are incurred to exit your most successful trades.