A credit spread, in financial derivatives, represents a sophisticated options trading strategy involving the simultaneous purchase and sale of two options of the same type (both calls or both puts) on the same underlying asset with the same expiration date but different strike prices.
Mechanism
The operational mechanism of a credit spread is to generate a net premium income for the trader, as the option sold has a higher premium than the option bought. This strategy creates a defined risk and reward profile, where both the maximum potential profit (the net premium received) and the maximum potential loss (the difference between strike prices minus the net premium) are known at the outset.
Methodology
Within crypto institutional options trading, employing credit spreads is a strategic methodological approach to monetize time decay and specific volatility expectations, particularly when a trader anticipates limited price movement in the underlying cryptocurrency or seeks to enhance yield on an existing position. This technique allows for a highly controlled risk exposure, aligning with capital preservation objectives in dynamic digital asset markets.
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