Best way to trade credit spreads

Of course all trades in the market are financial transactions and thus subject to some risk.

However, unlike uncovered options which can have substantial or unlimited risk, especially for naked calls , in most cases you can calculate the exact amount of risk at the time you enter the position. There are many types of credit spreads that can be employed depending on your stance on the stock or the overall market conditions.

In my experience, credit spreads are a great way to produce income in a grinding or consolidating market environment. The strategy I use for my clients involves SPX credit spreads. Put on these trades when the market sells off and appears to be bottoming.

The goal of the credit spread is to produce a net credit — this is your income, and you cannot make any more money than the credit you bring in. The credit is produced because the premium you pay when you purchase the option is lower than the premium you receive when the option is sold. The difference in the strike prices is called the spread; your risk is the spread less the credit received.

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When the spread value reaches. If it is very obvious that my strike prices are not going to be met, I can let it expire worthless and keep the full credit. In fact, that is our goal each tim we enter the trade.

Therefore, we want to maintain maximum flexibility and have the option to close out the spread earlier in order to avoid a potential tail risk event.

Credit spreads are typically considered bullish or bearish, but I find that selling them way out of the money, underneath major support, and with a very low odds of being in the money during my expiry is a more neutral approach to using credit spreads to generate income. Credit spreads are an integral part of my portfolio management. While I specialize in the SPX laddering of trades, this trading method works for any stock, ETF, or index.

If you would like more information on my portfolio management services please contact me at suz at investsps dot com. Home Options Insights Blog Options Trading Charts Options Trading Strategies Stock Market Analysis Options Trading Webinars Trading Service Membership Combination Memberships EO Spread Trader Trading Resources Chart of the Week Options Trading eBooks 4 Essential Rules Yes You Do Have Options The Art of Selling: Options Trading eBook Trading Stories from the Trenches Options Insights Webinar Options Trading FAQs What Is Spread Trading?

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By Suzie Smith , August 16, As an options trader, I would like to know two things BEFORE I put on a trade: I give up potential gains in return for taking on less risk.

There are three different types of credit spreads to consider: Simultaneously purchase and sell options puts or calls at different strike prices. A bullish position in which you obtain more premium on the short put.

A bearish position in which you obtain more premium on the short call. Spreads can lower your risk substantially if the stock moves dramatically against you.

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The margin requirement for credit spreads is substantially lower than for uncovered options. It is not possible to lose more money than the margin requirement held in your account at the time the position is established.

With uncovered options, you can lose substantially more than the initial margin requirement. However, spreads should be reviewed occasionally to determine if holding them until expiration is still warranted. For example, if the underlying instrument moves enough, you may be able to close out the spread position at a net profit prior to expiration. Due to the wide range of strike prices and expirations that are typically available, most traders are able to find a combination of contracts that will allow them to take a bullish or bearish position on a stock.

This is true of both debit spreads and credit spreads.

Option Credit Spread Strategy: An Opportunity For Success | OptionsANIMAL

Your profit potential will be reduced by the amount spent on the long option leg of the spread. Explosive Options Home Options Insights Blog Options Trading Service Membership Options Trading Resources About Explosive Options Member Login Privacy Policy Terms of Service.

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