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Options basics

Before credit spreads make sense, you need four ideas: what a call and a put are, what you pay or receive for them, what “long” and “short” mean, and why Spruce prefers spreads over naked short options.

Not financial advice

Educational material only. Read your broker’s options risk disclosure before trading.

The one-sentence picture

An option is a contract. A call is the right to buy a stock at a set price (the strike) by a set date (expiration). A put is the right to sell at the strike by expiration.

You can buy that right (you pay a premium) or sell that right (you collect a premium — and take on an obligation).

Long vs short, without jargon

Role Cash at open Everyday analogy Risk shape
Long (you buy the option) You pay Buying insurance or a ticket Loss usually capped at what you paid
Short (you sell / write the option) You receive Selling insurance Risk depends on whether you hedged

Spruce’s income path is about collecting premium — but only when a second option caps how bad things can get. That structure is a credit spread.

Why not sell a naked call?

An uncovered (naked) short call can lose a theoretically unlimited amount if the stock keeps rising. Broker and OCC disclosures call this out clearly. [verified] Spruce treats naked shorts as education-only, not an operating default.

Premium, strike, expiration

  • Premium — the market price of the option. On a spread, you care about the net credit (what you received minus what you paid for the long leg).
  • Strike — the price baked into the contract.
  • Expiration — when the contract ends. Many U.S. equity options are American-style, so early exercise (and assignment on shorts) is possible.

One standard equity option usually covers 100 shares, so a $1.00 option price is about $100 of cash per contract (before fees).

Intrinsic value and time value

Think of premium as two pieces:

  • Intrinsic — value if you exercised right now (only in-the-money options have this).
  • Time value (extrinsic) — the rest. It tends to shrink as expiration approaches, all else equal. That decay is related to theta, covered next in Greeks.

Credit spreads mainly harvest time value, as long as the stock stays away from the danger zone of your short strike.

From single options to a spread

A vertical credit spread means:

  1. You sell one option.
  2. You buy another option of the same type and expiration, further out of the money.
  3. The long option is your insurance. It turns an open-ended short into a defined max loss.

That is the whole engine behind put credit spreads (PCS) and call credit spreads (CCS). The next page walks through the math and the shape of the payoff.

What to do next

Continue to Credit-spread payoffs. If a word feels fuzzy, open the glossary in another tab.

Sources

Not financial advice. Verify broker rules yourself.