Credit spreads explained
A credit spread is selling one option and buying a further one in the same expiry to cap the loss. You collect less premium and the worst case becomes a fixed number instead of an open question. On the worked trade the credit drops from $73 to $38 and the maximum loss drops from unbounded to $162.
Everything else on this site secures the obligation with something real: 100 shares behind a covered call, strike times 100 in cash behind a put. A credit spread does it differently. It caps the obligation with another option, which is cheaper and worse in ways worth being precise about.
The trade
DKNG at $38.40, September 19 expiry, 45 days out. Same chain as the chain page.
| Leg | Action | Price | Delta | Cash |
|---|---|---|---|---|
| $42 call | sell 1 | $0.73 | 0.268 | +$73 |
| $44 call | buy 1 | $0.35 | 0.153 | -$35 |
| Net | $0.38 | 0.115 | +$38 |
- Credit: $38, yours the day it fills.
- Width: $2 between the strikes, so $200 per contract.
- Maximum loss: $200 minus the $38 credit = $162. That is the number, and nothing DKNG does makes it larger.
- Break-even: $42.38.
- Return on risk: 23.5 percent in 45 days.
What the wing costs
Here is the whole page in two numbers. Sell the $42 call on its own and you collect $73. Buy the $44 to cap it and you give back $35.
That is 47.9 percent of the gross premium, spent on protection against an outcome that starts hurting only above $44.
And that protection is not a bargain. It is priced by the same market, off the same model, at 34.4 percent implied volatility. You are paying fair value for insurance, which is the correct thing to expect and the opposite of how spreads are usually pitched.
So the reason to buy the wing is not that it is cheap. It is that a naked short call has a loss with no bottom line on the table, and one takeover announcement inside 45 days is enough. You are not buying value. You are buying the ability to still be here afterwards.
Where it ends up
| DKNG at expiry | Result | P and L | Odds |
|---|---|---|---|
| Below $42 | both expire worthless | +$38 | 75.6% |
| $42 to $42.38 | short call in the money, still ahead | +$1 to +$37 | 2.0% |
| $42.38 to $44 | losing, partially | -$1 to -$162 | 7.4% |
| Above $44 | both in the money, spread at full width | -$162 | 14.9% |
Three quarters of the time nothing happens. One time in seven you take the whole $162. Multiply those out and, like every fairly priced option trade on this site, the expected value is about zero.
One note on the odds column, because two numbers on this site disagree and the disagreement is real. The $42 strike's own implied volatility of 35.3 percent prices it as a 22.9 percent chance of finishing in the money. The table above, which needs one volatility for the whole distribution, uses the at-the-money 38.4 percent and gets 24.4 percent. The 1.5 point gap is skew, showing up as an inconsistency you cannot model away with a single number.
Against a covered call, on the same view
Both trades say the same thing: DKNG probably will not be much above $42 in six weeks.
| $42/$44 call spread | Covered call, $43 strike | |
|---|---|---|
| Capital required | $162 | $3,840 of stock |
| Credit | $38 | $49 |
| Return on capital, 45 days | 23.5% | 1.28% |
| Annualized | 190% | 10.4% |
| Worst case | -$162 | -$3,791 if DKNG goes to zero |
| Upside if it rallies | none | $460 of appreciation to the strike |
| Dividends, votes, holding | none | yours |
That 190 percent number is why credit spreads get sold hard, and it is doing something dishonest. The denominator is $162 because the risk is $162, and the absolute dollars are lower than the covered call's. $38 against $49. A percentage return on a tiny base is not more money.
The real arguments for the spread are the other rows. You do not need $3,840. You are not left owning a stock you did not want. The worst case is a number you can write down before you place the trade, which is the thing position sizing actually needs.
The real arguments against are the last two. You never own the shares, so there is no dividend, no long-term holding period, nothing to wheel, and no version of the trade where being wrong leaves you holding something you wanted anyway.
Four things that go wrong
Both legs cross a spread. Twice on the way in, twice on the way out. Send it as a single spread order with one net limit rather than legging in, and start at the net mid of $0.38. Legging in on a moving chain is how a $38 credit becomes a $31 credit.
Early assignment on the short leg. These are American-style contracts. If the $42 call is assigned early you are short 100 shares, with a long $44 call as your only protection, and a margin call arriving before you have decided anything. It is not common. Read the extrinsic value test and check it in the last week.
Pin risk between the strikes. DKNG finishing at $42.90 leaves the short in the money and the long worthless. You are assigned on one leg only, so on Monday you are short 100 shares at $42 with a long call that expired. That is the messiest ending this structure has, and it is the same mechanism as on a single option, doubled.
Sizing by contract count. Ten of these is $1,620 of risk, not ten small trades. The maximum loss is genuinely reachable at 14.9 percent per trade, which over eight cycles a year is more likely to happen than not.
Picking the width
Wider strikes mean more credit and more risk, and the ratio moves.
| Spread | Credit | Max loss | Return on risk | Odds of max loss |
|---|---|---|---|---|
| $42 / $43 | $22 | $78 | 28.2% | 17.2% |
| $42 / $44 | $38 | $162 | 23.5% | 12.6% |
| $41 / $43 | $51 | $149 | 34.2% | 17.2% |
| $43 / $45 | $28 | $172 | 16.3% | 9.0% |
The best-looking return on risk belongs to the $41/$43, which is also the one whose short strike is closest to the money. That is the pattern across the whole table and it is not a coincidence: the return on risk goes up as the risk goes up. There is no width that is free, and choosing by that column alone walks you straight to the most dangerous spread on the chain.
Spreads need a higher options approval level than covered calls or cash-secured puts at most brokers, and they are multi-leg orders: two or four legs to fill on the way in and the same on the way out. Every price here is an illustrative worked example computed off one chain, not a quote.
OptionsKing scores every candidate strike on a deterministic 0 to 100 scale, blends that score with the return on the capital the trade ties up, and shows you the highest-ranked handful. There is no minimum score. How it works covers what the ranking does and does not tell you.
Questions people actually ask
What is a credit spread in options?
Selling one option and buying a further out one in the same expiry, so you collect a net credit and the maximum loss is capped at the width between the strikes less that credit. On the worked trade that is $2 wide less $38, so $162.
How much does the long leg of a credit spread cost?
On the worked trade, $35 of the $73 the short call alone would have paid: 47.9 percent of the gross premium. It is priced at fair value by the same market, so the reason to buy it is capping the loss, not finding a bargain.
Is a credit spread better than a covered call?
It needs $162 instead of $3,840 and caps the worst case at a known number. It also pays fewer absolute dollars, $38 against $49, gives you no shares, no dividends and no upside, and the high percentage return is an artifact of the small denominator.
Can I be assigned early on a credit spread?
Yes, on the short leg, because listed equity options are American style. That leaves you short 100 shares with only the long option as cover. Check the remaining extrinsic value on the short leg in the final week.
Sources
Rules and thresholds above were checked against these documents on August 4, 2026. Exchange and broker rules change. Confirm anything you are about to act on with your own broker.
Keep reading
Do the math on your own trade
Every price in this article is an illustrative worked example, not a quote. Read the Learn hub for the rest of the series, and the disclaimer before you act on any of it. Selling options carries real risk of loss, and the loss can be far larger than the premium you collected.