What Is a Credit Spread?
A credit spread is the difference in yield between a safe bond (like a U.S. Treasury) and a riskier bond (like a corporate bond).
Key Points:
Bigger spread = higher risk.
Smaller spread = more confidence in the economy.
Credit spreads change due to credit ratings, interest rates, market mood, and bond liquidity.
Example:
Treasury bond: 3%
Corporate bond: 5%
Credit spread = 2%
When the economy is strong, spreads are small. In uncertain times, spreads grow.
In Options Trading:
A credit spread means selling one option and buying another, so you start with a net credit (profit).
Two common types:
Bull Put Spread: Expect price to stay the same or go up.
Bear Call Spread: Expect price to go down or stay below a certain level.
Example:
Sell $55 call for $400
Buy $60 call for $150
Net credit = $250, and your maximum loss is also $250
Summary:
Credit spreads help measure risk and market sentiment — useful for both bond and options traders.