An option that allows the holder to take either a long and or short credit position so as to hedge the risk of an adverse credit event. Specifically, it helps transfer credit risk between two parties. To that end, the protection buyer will have to pay a premium to the protection seller in exchange for promised cash flows that would need to be paid to the former if a particular credit spread (for example, the spread between corporate debt and LIBOR) widens or narrows. The credit spread is usually derived from the difference between two interest rate benchmarks.

It is also referred to as a credit spread option.