Credit Spread

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DEFINITION of '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.

BREAKING DOWN 'Credit Spread'

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".

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RELATED FAQS
  1. What are the most popular and useful measures of credit spread?

    The most popular and useful measures of the credit spread, also known as the yield spread, are the z-spread and the option-adjusted ... Read Full Answer >>
  2. What does negative vega mean for credit spreads?

    Greek vega measures an option's sensitivity with respect to a change in the underlying asset's volatility. The vega of an ... Read Full Answer >>
  3. What's the difference between a credit spread and a debt spread?

    When trading or investing in options, there are two main option spread strategies, credit spreads and debit spreads. Credit ... Read Full Answer >>
  4. What does positive theta mean for credit spreads?

    Theta is an option Greek that measures the rate of change in an option's value with respect to the passage of time. When ... Read Full Answer >>
  5. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
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    After-hours trading (AHT) refers to the buying and selling of securities on major exchanges outside of specified regular ... Read Full Answer >>
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