Prerequisite: Basic understanding of Options

Why Credit Spreads?

A Credit Spread is an income-generating options strategy that pays a credit for executing the trade. With credit spreads, you profit both directionally and as time passes. Time is on your side!

• Broker 👉🏽 Robinhood
• Ticker 👉🏽 $SPY (S&P 500 ETF)
• Options Strategy 👉🏽 Credit Spread

Search for SPY on Robinhood

Click Trade then click Trade Options

Robinhood Mobile

$SPY is an ETF that represents the S&P 500. It is one of the most liquid trading vehicles for options trading.

The Options Chain

An options chain is a list of contracts available for trade. It includes all the information needed to set up an options trade.

Below is Robinhood's options chain for $SPY. You will use this window to find the best credit spread.

Robinhood Desktop

How to set up a Credit Spread

There are three main components for setting up credit spreads.

1. The Expiration: the date the contract expires
2. The Anchor: the boundary your betting price will not cross by expiration.
3. The Hedge: protection from major risk.

Set the expiration date

Expiration date: The date on which the option contract expires and can no longer be exercised.

Choose the expiration that aligns with your strategy. A 1-DTE (1 day until expiration) option expires the day following execution.

Contracts expire at the end of the trading day. The U.S. the stock market closes at 4:30pm Eastern Standard Time.

Robinhood Desktop

Credit Spreads can be executed on the call-side or put-side of a contract.

Robinhood Desktop

Call Credit Spreads

If you are BEARISH, select the CALL side.

If you are bearish by the expiration date, you will start by selling a call. Select the SELL button, then the CALL button (SELL/CALL).

From here, you will set the Call-side anchor and the hedge.

Set up the CALL side Anchor.

Anchor: the boundary we are betting on that doesn't get crossed by expiration.

We set the anchor by selling a call above the current price. We are betting the price will stay below this boundary by expiration.

Set up the CALL side Hedge

Hedge: protection against the boundary being crossed.

We buy a call above the anchor to hedge risk. If the boundary is crossed, the hedge gains value to offset losses.

A call-side credit spread is a bearish strategy in which we set the anchor (SELL/CALL) above the current price and the hedge (BUY/CALL) above the anchor. We are betting the price will close below the anchor by expiration.

Execution Process

Robinhood Mobile

Put Credit Spreads

If you are BULLISH, select the PUT side

If you are bullish by expiration, you will start by selling a put. Select the SELL button and the PUT button (SELL/PUT).

From here, you will set the Put-side anchor and the hedge.

Set up the PUT side Anchor

We are setting the anchor by selling a put below the current price. We are betting the price will stay above this boundary by expiration.

Set up the PUT side Hedge

We buy a put below the anchor to hedge risk. If the boundary is crossed, the hedge gains value to offset losses.

The put-side credit spread is a bullish strategy in which we set the anchor (SELL/PUT) below the current price and the hedge (BUY/PUT) below the anchor. We are betting the price will close above the anchor by expiration.

Execution Process

Robinhood Desktop

Visual Summary

The Logic

• Call credit spreads are set up above the current price, and we are betting the price will close below the anchor by expiration.
• Put credit spreads are set up below the current price and we are betting the price will close above the anchor by expiration.
• The anchor (sold option) is always closer to the current price, while the hedge (bought option) is further away from the current price.
• The sold option is always the anchor, while the bought option is always the hedge.
• The credit you receive comes from the sold option, while the cost is always the bought option.
• The difference between the credit and the cost is your net profit.