An option whose payoff depends on the spread between the yields earned on two underlying assets. For example, this option may be based on the basis spread between the debt of a particular corporate borrower and treasury debt (sovereign debt) with a similar maturity. Differently stated, this option involves the transfer of credit risk from one counterparty to another. Trading a credit spread option means an investor is taking a hedge/ bet on the narrowing or widening of a credit spread (between a risky issue and a risk-free issue or generally between two different debt issues). The option will pay out the difference between the credit spread at maturity and a strike spread determined at the trade date. Credit spread options are mainly classified as credit spread calls and credit spread puts.

The credit spread option is also referred to as a Eurobond option.