Credit Spread
1. The spread between Treasury securities and non-Treasury securities that are identical in all respects except for quality rating.
2. An options strategy where a high premium option is sold and a low premium option is bought on the same underlying security.
Investopedia Commentary
1. For instance, the difference between yields on treasuries and those on single A-rated industrial bonds. A company must offer a higher return on their bonds because their credit is worse than the government's.
2. An example would be buying a Jan 50 call on ABC for $2, and writing a Jan 45 call on ABC for $5. The net amount received (credit) is $3. The investor will profit if the spread narrows.
Can also be called "credit spread option" or "credit risk option".
Related Links
Vertical Bull and Bear Credit Spreads
Managing Bull Put Spreads With A Simple Adjustment Plan
Profiting from Time-Value Decay with S&P 500 Options on Futures
See also: Corporate Bond, Credit, Premium, Treasury Bond
credit spread