credit options

correct or incorrect “credit options written on an underlying asset will protect against declines in asset valuation.” “correct”, by schewser’s verdict. but, my impression has been that credit options are for certain credit events or credit related spread changes. they dont ride on security valuation directly. am i wrong?

A credit spread option can be where you sell a high premium option and purchase a low premium option on the same asset. So if the asset value declines you have protection. A CDS will pay out on a credit event, not on the decline in value.

In any event, if you are holding CDS on just about any financial firm over the last 6 months you made pretty good coin. Holding a CDS is just like being short a bond.

bigwilly Wrote: ------------------------------------------------------- > A credit spread option can be where you sell a > high premium option and purchase a low premium > option on the same asset. So if the asset value > declines you have protection. > > A CDS will pay out on a credit event, not on the > decline in value. i am not sure i understand you. what if credit spread remains unchanged (say 200 bps over treasury, and i have an option written on this spread), but my bond value declines with the treasury due to the interest movement?

Whoa you guys are talking about different things here - bigwilly is talking about an option strategy (a credit spread involving buying and selling options with different strikes) and rand0m is talking about an option on a credit spread. Different…