- A credit spread strategy is a fundamental options trading technique where an investor simultaneously buys and sells options on the same underlying asset.

- This strategy involves selling an option with a higher premium while buying an option with a lower premium, resulting in a net credit to the trader. 

- The goal of a credit spread is to potentially capitalize on the price movements of the underlying asset by forecasting that the options will expire out of the money.

- Credit spread strategies combine the sale of one option with the purchase of another option on the same underlying asset. 

- This strategy allows traders to generate a net credit upfront while positioning themselves to potentially benefit from specific market conditions.

- The key principle behind credit spreads is the expectation that the options being traded will expire out of the money, enabling the trader to retain the initial credit received. 

- By selecting options with different strike prices, traders can create varying degrees of risk and reward.

- This approach offers a defined risk profile, limiting potential losses (theoretically) while providing the opportunity to potentially profit from the time decay and volatility of options.

Many things can cause credit spreads to go up or down:

1. Credit ratings

Lower-rated bonds (like junk bonds) usually have higher yields and bigger spreads.

2. Interest rates

When interest rates rise, riskier bonds often see their spreads increase.

3.Market sentiment

When market confidence is low, even solid companies can see their bond spreads widen.

4.Liquidity

Bonds that are harder to trade present higher trading risks and tend to have wider spreads.

1. Small spread

 A top-rated corporate bond pays 3.5%, and a Treasury bond pays 3.2%. The spread is 0.3% or 30 basis points. This indicates strong trust in the company.

2.Large spread

A lower-rated bond pays 8%, while the Treasury still pays 3.2%. The spread is 4.8% or 480 basis points. This larger spread indicates a higher risk.