The plain-English definition
A credit spread combines two options of the same type and expiration at different strike prices. One option is sold and another is bought. The premium received for the short leg is greater than the premium paid for the long leg, so opening the pair produces a net credit.
The long option places a defined boundary on the spread's expiration loss. It is not a guarantee against every execution or assignment complication, but it changes the economic exposure from an unbounded or stock-like obligation into one limited by the distance between the strikes.
Put spreads and call spreads
A put credit spread uses two puts and is harmed by a sufficiently large decline in the underlying. A call credit spread uses two calls and is harmed by a sufficiently large rise. In both cases, the short option is closer to the underlying price than the purchased option when the position is opened.
Maximum gain, loss, and breakeven
The opening credit is the maximum gain at expiration. The maximum loss is the spread width minus that credit, before fees and taxes. The breakeven adjusts the short strike by the credit: downward for a put spread and upward for a call spread. These boundaries describe the combined position at expiration, not the price path it may take beforehand.
Expiration and assignment
The two legs are separate contracts. The short leg can be assigned while the long leg remains open, creating temporary share or cash obligations even though the spread's expiration payoff is defined. Expiration near a strike adds uncertainty because exercise decisions for the legs may differ. Closing the spread as a pair removes both contracts; closing only one changes the risk.
Common misunderstanding
“Defined risk” does not mean “small risk.” A wide spread can still have a maximum loss many times larger than its credit. The width, credit, contract handling, and transaction costs all belong in a complete description of the structure.