How to Evaluate a Credit Spread Before Entry

By Rohan Fernandes, Founder · Updated 2026-08-22 · Educational reference, not investment advice

1. Check the volatility premium. Compare the at-the-money implied volatility against the stock's realized volatility (NVRP). A credit spread is a volatility sale; when implied prices less than the stock actually moves, the sale is underpaid regardless of how the chart looks.
2. Place the short strike by delta and by the tape. A short strike in the 0.15-0.30 delta band carries implied breach odds of roughly 15-30%. Distance is then double-checked in expected-move units against the recent trading range: a strike the model calls safe but the tape has visited recently deserves skepticism toward the tape.
3. Screen liquidity on the strikes being traded. Open interest and daily volume floors on the short strike, plus a bid-ask width ceiling relative to mid. The exit pays the spread twice; a quote wider than about 15% of mid taxes away much of the edge.
4. Clear the event calendar. No expiration spanning the stock's earnings date, and a check for macro events (Fed decisions, CPI, option expiration days) near entry. Event gaps break the continuous-market statistics every other check depends on.
5. Demand adequate compensation. Credit received as a fraction of strike width, commonly floored around 20%. Below the floor, the occasional full loss takes too many winners to repay.
6. Size from the worst case. Max loss is width minus credit. Sizing rules cap that worst case per trade (for example 5% of allocated capital) and cap total open worst-case risk across all positions, so a clustered losing streak stays an ordinary drawdown.

Why a fixed sequence instead of judgment per trade?

Each check exists because skipping it has a known failure mode, and the sequence exists because the checks interact: rich volatility argues for selling, but not through an earnings print; a beautiful credit means nothing on strikes that cannot be exited. Running the same checks in the same order on every candidate is what makes results comparable across months, and what makes the record auditable when a rule deserves rethinking. Options Scanner runs this sequence deterministically and logs which check failed and by how much, but the sequence itself predates any software: it is the discipline, automated.

What the checklist deliberately excludes

Conviction about direction. A credit spread's edge is the volatility premium and time decay, not a directional forecast; the signal picks which side to sell, and everything after that is risk plumbing. The checklist also excludes any override for a particularly tempting credit: a rich premium on a candidate that fails liquidity or event checks is rich for a reason.