Credit Spread Narrowing and Expiration Dynamics
An options trader sells a credit spread. The trader will maximize profitability if the spread between the two option premiums:
Memory hook: 'Credit - Narrow - Expire' (C-N-E). A credit spread seller collects cash upfront and wants the spread to narrow to zero so both options expire worthless.
Complete Analysis & Legal Rationale
Credit spread sellers profit when the contracts decay and expire unexercised, allowing the writer to keep 100% of the initial credit.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
Narrowing to zero means both expire worthless and seller keeps entire credit.
Widening to the strike difference produces maximum loss for a credit spread.
Widening and exercise is what debit spread buyers desire.
Non-responsive distraction.