Credit spread option,
Definition of Credit spread option:
In the financial world, a credit spread option (also known as a "credit spread") is an options contract that includes the purchase of one option and the sale of a second similar option with a different strike price. Effectively, by exchanging two options of the same class and expiration, this strategy transfers credit risk from one party to another. In this scenario, there is a risk that the particular credit will increase, causing the spread to widen, which then reduces the price of the credit. Spreads and prices move in opposite directions. An initial premium is paid by the buyer in exchange for potential cash flows if a given credit spread changes from its current level.
Trading position in which the price of option bought is lower than the price of option sold.
The buyer of a credit spread option can receive cash flows if the credit spread between two specific benchmarks widens or narrows, depending upon the way the option is written. Credit spread options come in the form of both calls and puts, allowing both long and short credit positions.
How to use Credit spread option in a sentence?
- As an investor enters the position, he receives a net credit; if the spread narrows, he will profit from the strategy.
- A credit spread option is a type of strategy involving the purchase of one option and the sale of a second option.
- The two options in the credit spread strategy have the same class and expiration but vary in terms of the strike price.
Meaning of Credit spread option & Credit spread option Definition