The difference between the values of two options, that is made when the value of the one sold exceeds the value of the one bought. In other words, this spread involves the purchase of one option and the sale of another, with both belonging to the same class and having identical expiration dates. The only difference between the two options is the strike price. Investors receive a net credit for entering the position, and therefore they will be better off when the spread narrows or expires. Technically speaking, credit spreads are negative vega since, if the price of the underlying remains unchanged, the investor will tend to make money from decreasing volatility. Furthermore, credit spreads are positive theta in the sense that, if the price of the underlying doesn’t move past the short strike, the investor will tend to make money just by the passage of time (time decay). The net credit received is always equal to the difference in premiums.

The credit spread is the opposite of the debit spread.

In a different context, credit spread is defined as the spread that is attributed to the credit risk associated with a defaultable instrument (e.g., a credit default swap or a defaultable bond) over a risk-free instrument (risk-free bond). Generally speaking, this spread represents the yield spread between securities with the same currency and maturity structure but with different credit risks. The spread is often expressed in relation to a corresponding benchmark or deemed risk-free rate, in which case it constitutes the spread required by the market to take on a lower credit quality.