Credit Spread

AAA

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.

VIDEO

Loading the player...

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".

RELATED TERMS
  1. Intermarket Spread Swap

    A swap transaction meant to capitalize on a yield discrepancy ...
  2. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with ...
  3. Corporate Bond

    A debt security issued by a corporation and sold to investors. ...
  4. Credit

    1. A contractual agreement in which a borrower receives something ...
  5. Premium

    1. The total cost of an option. 2. The difference between the ...
  6. Derivative

    A security with a price that is dependent upon or derived from ...
Related Articles
  1. Investing Basics

    Explaining Credit Spread

    A credit spread has two different meanings, one referring to bonds, the other to options.
  2. Personal Finance

    The Rise And Fall Of The Shadow Banking System

    We look at the evolution, failure and fallout from the shadow banking system.
  3. Options & Futures

    Options Trading With The Iron Condor

    This options strategy allows your profits to soar in a sideways market.
  4. Options & Futures

    How To Manage Bull Put Option Spreads

    Learn how to halt options losses when the market moves quickly in an unfavorable direction.
  5. Active Trading

    S&P 500 Options On Futures: Profiting From Time-Value Decay

    Writing bull put credit spreads are not only limited in risk, but can profit from a wider range of market directions.
  6. Options & Futures

    Vertical Bull and Bear Credit Spreads

    This trading strategy is an excellent limited-risk strategy that can be used with equity as well as commodity and futures options.
  7. Markets

    Taking Advantage Of Volatility Spikes With Credit Spreads

    Alert options traders can follow this strategy to improve their chances of success.
  8. Options & Futures

    Iron Condors: Wing It To Maximum Profit

    Understanding the right way to execute an iron condor can increase potential returns and limit risk.
  9. Options & Futures

    Spreading The Word About Portfolio Margin

    An underused opportunity provided in an SEC rule can enhance returns and lower risk for spread traders.
  10. Investing Basics

    Explaining Options Contracts

    Options contracts grant the owner the right to buy or sell shares of a security in the future at a given price.
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. How do futures contracts roll over?

    Traders roll over futures contracts to switch from the front month contract that is close to expiration to another contract ... Read Full Answer >>
  6. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend. A dead cat bounce ...
  2. Bear Market

    A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment ...
  3. Alligator Spread

    An unprofitable spread that occurs as a result of large commissions charged on the transaction, regardless of favorable market ...
  4. Tiger Cub Economies

    The four Southeast Asian economies of Indonesia, Malaysia, the Philippines and Thailand. Tiger cub economy indicates that ...
  5. Gorilla

    A company that dominates an industry without having a complete monopoly. A gorilla firm has large control of the pricing ...
  6. Elephants

    Slang for large institutions that have the funds to make high volumes trades. Due to the large volumes of stock that elephants ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!