Options-based income
Credit Spreads
You sell one option and buy a cheaper, further-out-of-the-money option in the same expiration, keeping the net credit and capping the worst case at the distance between the strikes.
A credit spread is a two-leg option trade in which the option sold is worth more than the option bought, so the account is credited on entry. The purchased leg is the defining feature: it caps the maximum loss at the difference between the strikes minus the credit received, times 100 per contract. The two standard forms are the bull put spread, which profits if the underlying stays above the short put strike, and the bear call spread, which profits if it stays below the short call strike.
Option premiums Semi-passive
The labels above place this income type before you read a word. The first is the mechanism — how the money actually reaches you, whether by lending it out, owning a slice of something, renting an asset, licensing a right, selling an option or owning a business somebody else runs. The second says whether the income keeps arriving on its own once it is running, or whether it needs work from you to keep coming. Both are descriptions of how the thing is built, not verdicts on it.
How it works
Both legs of a credit spread share the same underlying and the same expiration date; only the strike prices differ, and the option sold always sits closer to the current price than the option bought. A bull put spread sells a put and buys a lower-strike put in the same expiration, profiting if the underlying holds above the short strike through expiry. A bear call spread sells a call and buys a higher-strike call, profiting if the underlying stays below the short strike.
The net credit — premium received minus premium paid, times 100 per contract — is collected on entry and is the maximum possible profit. Maximum loss is the strike width minus that credit, times 100 per contract, and this number is known before the trade is placed. Brokers hold buying power equal to the maximum loss rather than the full notional, which is why a credit spread ties up far less capital than a cash-secured put at the same strike.
At expiration, if both strikes finish out of the money the spread expires worthless and the full credit is kept. If both finish in the money, the spread is worth its full width and the loss is capped there. The awkward outcome sits between the strikes: the short leg gets assigned while the long leg is not, leaving a stock position that must be closed. Cash-settled index options remove that assignment mechanic entirely, but introduce settlement-price quirks on the morning after expiry.
What it pays
The payment is the credit received at entry, and nothing more. However far the underlying moves in the position's favor, there is no additional upside beyond that initial premium. The credit is usually described relative to the strike width — a wider gap between credit and width signals a lower probability of loss and a smaller payment, while a narrow gap signals the opposite.
Pricing is driven by implied volatility, days to expiry, and how far the short strike sits from the current price. Because the long leg is purchased out of the collected premium, a credit spread always pays less than the naked short option it is built from; that gap is the cost of capping the loss.
Returns are typically quoted against capital at risk — the maximum loss — which produces headline percentages that look large but apply to a small, defined stake, not to a large account balance. Time decay works in the seller's favor: all else equal, the position gains value as expiration nears provided the underlying stays on the profitable side of the short strike.
Costs and taxes
Two commissions are charged on entry, and unless the position is left to expire worthless, two more on exit. Two bid-ask spreads must be crossed as well, and on a narrow credit this can consume a material fraction of the payment. Assignment and exercise fees apply if the short leg is assigned.
Under US tax rules, equity option spreads produce short-term capital gains or losses, recognized when the spread is bought back, expires, or is assigned. Broad-based index option spreads are treated as section 1256 contracts, receiving 60/40 long-term/short-term treatment with mandatory year-end mark-to-market, regardless of how long the position was actually held.
The straddle rules under IRC section 1092 can defer recognition of a loss on one leg while an offsetting leg remains open — relevant when the two legs are closed in different tax years. Assignment on the short leg converts part of the trade into a stock transaction, which changes both the character and the timing of the resulting tax event.
Liquidity and time commitment
The capital committed to the trade is the maximum loss, held as buying power from entry until the spread is closed or expires. Both legs must be traded to exit; brokers will accept the spread as a single combined order, but a wide market in either leg makes the joint exit more expensive than the theoretical mid-price suggests.
Short-dated spreads demand daily attention, since the risk profile changes fastest in the final days before expiry. Expiration week is the highest-maintenance period: a short strike sitting near the money can be assigned on any evening, and any resulting stock position has to be managed the next trading morning before it accrues further exposure.
This is an active strategy, not a set-and-forget one. The position has to be watched through its life, and treating it as passive is how a small, defined loss turns into a larger, undefined one.
How it goes wrong
A gap through both strikes — on an earnings surprise or overnight news — produces the full maximum loss immediately, with no opportunity to manage or adjust beforehand. The risk-reward is asymmetric by design: a small credit is collected against a much larger maximum loss, so a modest win rate is not sufficient. The arithmetic of the trade requires a high win rate simply to break even over many occurrences.
Pin risk occurs when the underlying finishes almost exactly at the short strike; it can be unclear until after the close whether assignment happened, leaving an unhedged position overnight. Assignment between the strikes leaves a long or short stock position while the long option leg remains open, an exposure that can move against the account before it is unwound the next session. Early assignment on a short call the day before an ex-dividend date can create a short stock position that owes the dividend payment.
Selling spreads into an earnings report collects unusually rich premium precisely because a large move is more likely, not less. Sizing positions by the credit collected rather than by the maximum loss quietly builds an exposure far larger than intended once many spreads are open at the same time. Illiquid options can make the actual exit price considerably worse than the mid-market value a platform displays.
What to remember
- A credit spread caps both profit and loss: maximum gain is the credit received, maximum loss is the strike width minus that credit, times 100 per contract.
- Buying power tied up equals the maximum loss, not the full notional, which is why spreads use less capital than a comparable cash-secured put or naked short.
- The between-the-strikes outcome is the operationally messy one: the short leg can be assigned while the long leg is not, leaving a stock position to unwind.
- Equity spreads are taxed as short-term gains or losses; broad-based index spreads get 60/40 section 1256 treatment with year-end mark-to-market.
- The trade is asymmetric by design — a small credit against a larger defined loss — so a high win rate is needed just to break even over time.
- This is an active position requiring monitoring through expiry, with the highest attention needed in the final days when assignment and pin risk are greatest.
This page explains how the income type works, which does not change from week to week, so it deliberately carries no rate and no price. The links below go to the pages that hold the current figures for it, each one stamped with the date the data was pulled. Read the mechanism here first: the numbers there are far easier to judge once you know what they are measuring.
See the live numbers: Options Income.
Frequently asked
What is a credit spread?
How much can I lose on a credit spread?
What happens if only the short leg is assigned?
How are credit spreads taxed in the US?
Written for information only. Nothing here is investment, tax or legal advice, and no page on this site recommends buying or selling anything. Rules and tax treatment change; verify anything that matters with a professional who knows your situation. This explainer was drafted by a language model (claude-sonnet-5) from an editor-approved outline and fact sheet, under the rules set out in our editorial policy, and carries no market figures. Last updated Jul 29, 2026.