2. An options strategy where a high premium option is sold and a low premium option is bought on the same underlying security.
1. For instance, the difference between yields on treasuries and those on single A-rated industrial bonds. A company must offer a higher return on their bonds because their credit is worse than the government's.
2. An example would be buying a Jan 50 call on ABC for $2, and writing a Jan 45 call on ABC for $5. The net amount received (credit) is $3. The investor will profit if the spread narrows.
Can also be called "credit spread option" or "credit risk option".
Investment dictionary. Academic. 2012.
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