In options trading, a net-credit spread is a strategic position where the total premium received from selling options surpasses the total premium expended for purchasing other options, resulting in an initial cash inflow. This implies a limited profit potential balanced against a defined risk.
Mechanism
This strategy typically involves selling an option with a higher premium and simultaneously buying another option of the same type, but with a different strike price or expiration, that carries a lower premium. For example, selling an out-of-the-money put and buying a further out-of-the-money put establishes a credit.
Methodology
Net-credit spreads are implemented when an investor anticipates a limited price movement or a directional bias for the underlying crypto asset. The maximum profit is confined to the initial net credit, while the maximum loss is calculated as the difference between the strike prices minus the net credit received. Risk management centers on precise strike price selection and monitoring the asset’s price trajectory.
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