Credit Spread Options (Put & Call)

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A credit spread option is a hedge/bet on the narrowing or widening of a credit spread (credit spread = risky yield - riskless yield). The credit spread put payoff = duration x notional x MAX [Credit Spread - Strike Spread, 0]. The Credit spread call payoff = duration x notional x MAX [Strike Spread - Credit Spread, 0]. So a buyer of a credit spread call profits from a narrowing of the spread. For example, investor holds foreign bond and thinks that foreign economy will improve such that credit spread will narrow. He or she could sell (short) a credit spread put or buy a credit spread call. But note these are not the same: the short put merely hopes to pocket the up-front premium (limited payoff), the long call has unlimited upside.

Channel: Education
Uploaded: November 30, 1999 at 12:00 am
Author: bionicturtledotcom

Length: 08:30
Rating: 5.0
Views: 14687

Tags: Finance Derivative

Video Comments

Rickroll604 (November 30, 1999 at 12:00 am)

Great video, thanks

supersimpson2001 (November 30, 1999 at 12:00 am)

Could someone help me out? My textbook here says that (quote) "A credit spread call option is a call option whose payoff increases as the risk premium or yield spread on a specified benchmark bond of the borrower increases above some exercise spread". Why is my textbook implying that you stand to GAIN if the spread WIDENS for a credit spread CALL option? That's opposite of what you said.

dubseller (November 30, 1999 at 12:00 am)

very informative. THANKS! But could you possibly show an example in a video?

cjharrol (November 30, 1999 at 12:00 am)

Yeah, for credit spreads