To do a credit spread, you open a margin account with options approval, sell one option and buy another of the same type and expiration at a different strike on the same underlying, and submit both legs together as a single limit order for a net credit. The premium you collect on the sold leg is larger than what you pay for the bought leg, and the difference is your maximum profit. The bought leg caps your loss.
What You Need Before You Can Place the Trade
Three things have to be in place: a margin account, options approval at the right level, and enough buying power to cover the worst-case loss on the spread.
A cash account will not work. Because a credit spread contains a short option, your brokerage needs to hold collateral against the obligation that short leg creates, and only a margin account does that. FINRA Rule 4210 sets the floor at $2,000 in equity before any new margin transaction can go through.1FINRA. FINRA Rule 4210 – Margin Requirements
On top of the margin account, you need options approval at a level that permits multi-leg strategies. Most brokerages call this Level 2 or Level 3. Approval usually involves a questionnaire about your experience, income, net worth, and objectives so the brokerage can confirm you understand that a credit spread has real, though defined, downside risk.
Every spread you open reduces your available buying power by the maximum possible loss on that trade. Max loss equals the width of the spread (the dollar gap between the two strikes, times 100 shares per contract) minus the credit collected. A spread with five points between strikes that collects $1.50 in credit ties up $350 per contract: $500 of width minus $150 of credit. If your account does not have that much free buying power, the order gets rejected before it reaches the exchange.
Picking the Direction and the Strikes
Start with a liquid underlying. Stocks and ETFs with heavy daily options volume have tighter bid-ask spreads on the option chain, and tighter spreads mean more of the quoted credit actually ends up in your account. Thin volume produces wide quotes that quietly eat into your edge before the trade even begins.
Your outlook picks the structure:
- Neutral to bullish: a bull put spread. Sell a put at a higher strike, buy a put at a lower strike, same expiration.
- Neutral to bearish: a bear call spread. Sell a call at a lower strike, buy a call at a higher strike, same expiration.
In both cases the option you sell is closer to the current stock price and carries the larger premium; the option you buy is further out and cheaper. The difference is your net credit.
Strike selection is where your risk tolerance gets expressed in dollars. The closer the short strike sits to the current price, the more premium you collect, and the higher the odds the trade moves against you. Many traders use delta as a rough probability guide: a short strike with a delta around 0.15 to 0.30 implies roughly a 70% to 85% chance of expiring worthless. The distance between the two strikes sets your maximum loss, so a wider spread pays more credit but requires more collateral and carries a bigger dollar risk.
Expiration matters too. A common target is 30 to 45 days out. That window balances meaningful time decay on the short leg against enough room for the underlying to wobble without breaking the trade. Shorter expirations decay faster but leave less margin for error; longer expirations pay more upfront but expose you to more price movement.
Before you send the order, glance at the bid-ask spread on each leg. A $0.30 gap between bid and ask on either leg can cost you real money on the fill.
Placing the Order
Use your brokerage’s multi-leg or spread order type. That submits both legs as a single package so they execute together or not at all. Do not enter them one at a time. Legging in — getting filled on the short leg while the long leg sits unfilled — leaves you holding a naked short option, which on the call side carries theoretically unlimited risk.
Enter the order as a limit order and specify the net credit you want. A reasonable first attempt is the midpoint between the natural bid and natural ask on the spread. If it does not fill within a few minutes, walk the limit price down by $0.05 increments toward the natural bid until you get a fill or decide the price is not worth it. Skip market orders on spreads; they tend to fill at the worst possible price because the market maker collects the full bid-ask gap on both legs.
Before you confirm, check the summary screen. It should show your total net credit, your maximum loss, the buying power reduction, and the strikes and expiration you intended. Once submitted, the order sits in your working orders tab until it fills. When it does, open the positions tab and confirm the brokerage has grouped the two legs as a single spread. Grouped positions get spread-based margin treatment; ungrouped legs may be margined as a naked short.
What You’ll Pay to Open and Close
A credit spread is two contracts, so every per-contract fee hits twice on the open and twice again on the close.
At full-service brokerages, per-contract commissions are typically $0.65 at firms like Schwab, Fidelity, and E*TRADE. That works out to about $1.30 to open the spread and another $1.30 to close it. Some discount brokerages advertise no options commissions, though they may recoup the difference through wider execution or payment for order flow.
Regulatory fees are small but real. The SEC’s Section 31 transaction fee is $20.60 per million dollars of sale proceeds on option sales.2U.S. Securities and Exchange Commission. Section 31 Transaction Fee Rate Advisory for Fiscal Year 2026 FINRA charges a Trading Activity Fee of $0.00329 per options contract.3FINRA. FINRA Fee Adjustment Schedule Exchanges add an Options Regulatory Fee — Cboe Options, for example, charges $0.0023 per contract on customer orders.4Cboe Global Markets. Cboe Options Exchange Regulatory Fee Update Effective January 2, 2026 Individually none of these matter much. On a narrow spread that collects only $50 to $100 in credit, they add up enough to notice.
Exiting the Position
You have two ways out: let the spread expire, or close it early with a buy-to-close order.
Letting It Expire
If the underlying is trading comfortably outside both strikes at expiration, both options expire worthless, the collateral is released, and you keep the entire credit. No action required. The word doing the work there is “comfortably.” If the stock is hanging near your short strike in the last day or two, passive expiration turns into a coin flip rather than a plan.
That coin flip is pin risk. A stock that closes a penny in the money triggers automatic exercise, and after-hours price movement can flip an option from in-the-money to out-of-the-money between the close and the exercise cutoff. If your short leg gets assigned while your long leg expires worthless, you show up Monday holding a stock position you did not want, plus the margin requirements that come with it. The simplest fix is to close the spread when the underlying is anywhere near your short strike heading into expiration.
Closing Early
Most experienced spread traders close before expiration once they have captured 50% to 80% of the maximum profit. The last chunk of profit takes a disproportionate amount of time to earn and keeps you exposed to a sudden adverse move that could wipe out the gains you already have. To close, enter a buy-to-close order on the spread as a single package: you buy back the short leg and sell the long leg together, paying a debit. If that debit is less than the credit you collected on the way in, the difference is your profit. Use a limit order and start at the midpoint, same as opening.
Closing early also makes sense when the trade has moved against you and is approaching maximum loss. Taking a partial loss beats riding it to the full one, and the released buying power can go to a better setup.
One more reason to close early: early assignment. American-style options, which cover almost all equity options, can be exercised by the holder at any time. Short calls face elevated assignment risk right before the underlying goes ex-dividend, because the holder may exercise to capture the dividend. Short puts can be assigned when they are deep in the money and have almost no time value left. When you get an assignment notice, the obligation is final; you deliver or accept shares at the strike. Your long leg is still there as protection, but using it is a separate transaction, and you may sit with an unhedged stock position for a business day in between. If the short leg has gone deep in the money and lost most of its extrinsic value, close the spread rather than wait.
Taxes on Credit Spread Profits
The tax picture depends on what the spread is written on.
Equity Options
Profits from credit spreads on individual stocks and most ETFs are taxed as short-term capital gains no matter how long you held the position. Open in January, expire in March, still short-term. That means ordinary income tax rates, which for most traders are higher than long-term capital gains rates. Holding a spread longer does not convert an equity option gain into a long-term gain.
Index Options
Credit spreads on broad-based index options like SPX or RUT get better treatment. Under Section 1256 of the Internal Revenue Code, gains and losses on these contracts are split 60% long-term and 40% short-term regardless of holding period.5Office of the Law Revision Counsel. 26 USC 1256 – Section 1256 Contracts Marked to Market For a trader in a high bracket, the blended rate can be meaningfully lower than straight ordinary income. Index options also settle in cash rather than stock, which removes assignment risk from the picture.
The Wash Sale Trap
If you close a credit spread at a loss and open a substantially identical spread within 30 days on either side of that closing date, the IRS disallows the loss under the wash sale rule. The disallowed loss is added to the cost basis of the replacement position, so the benefit is deferred rather than lost outright. The statute explicitly covers options.6Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities What “substantially identical” means for options is not clearly defined — the IRS has not published bright-line rules on whether shifting a strike or moving the expiration a week creates a genuinely different position. If you frequently reopen similar spreads on the same underlying after a loss, keep records and expect ambiguity.