Do not try to get more. So, on his days off and during layovers he read everything he could find on trading. Those times the stock is gapped one way or the other and those are great opportunities iptions to volatility spikes. The big winners Reply. How to sell Credit Spreads.




The constant fluctuation of the market as it searches for a direction has left more than one seasoned investor scratching his head in frustration. Yet, options can help to alleviate some of that anxiety. They can easily make money in bull or bear markets, and can serve as hedges on existing positions. Furthermore, the capital outlay for an options trade tends to be less than a traditional stock purchase. Today, I will briefly walk you through the credit spread options-trading strategy.

Nullifying the prevalent and erroneous theory that all options trades are risky and frequently losing propositions, credit spreads can be profitable the majority of the time. Of course, there is naturally a tradeoff. With the reduced risk comes a reduced profit. The Mechanics of the Credit-Spread Strategy. A credit spread consists of the simultaneous purchase and sale of puts or calls with matching expiration dates but different strike prices. An options player who is bullish to neutral on the underlying stock, index, or exchange-traded fund ETF would employ put options; a bearish trader would use selling credit spreads options trading system halted options.

The ultimate goal of a credit spread is simply to retain this credit with both options expiring worthless. Those with options experience limited to call and put purchases may wonder why bullish investors use puts and bearish investors use calls for the credit-spread strategy. This is because the goal crexit for both traded options to expire worthless.

Put options will lose value on a rally in the stock or no move at all, since the options traded are out of the money to begin with. Likewise, call options will expire worthless on a decline in the stock. Example: Bullish Credit Spread. Suppose a trader is bullish-to-neutral on XYZ, which is trading around the mark. There is short-term chart support in place at and nothing scheduled on the calendar that could cause a volatile swing in the shares earnings report, etc.

With just two weeks until options expiration, a credit spread is opened by selling a front-month strike put and buying a front-month strike put. With the stock atthe selking strike put is closer to the money and is therefore more expensive. The strike put is sold for 0. The initial credit is 50 cents per share, or 0.

The trader can keep this premium as long as XYZ advances, stays flat, or even drops to the level. A Note about Margin. This value is then multiplied by In the above example where a strike put was sold for 0. As mentioned above, the likelihood of a credit spread being profitable is very good. Through the use of out-of-the-money options, a credit-spread trader can profit from a wide range of outcomes.

Only when the sold option moves into the money is the position at risk of a loss. Typically, losses are capped at the difference between the strike prices of the options minus the originally collected premium. The maximum loss usually corresponds to the margin required. Even credit-spread losses compare favorably to a stock trade long or shortwhich can suffer unpredictable and steep losses if it moves in the wrong direction.

In rare circumstances, it is possible to lose more than this amount. This phenomenon can occur near expiration, when the sold option consists almost entirely of intrinsic value. If the underlying stock, index, or ETF moves contrary to expectations and the entire spread is in the money, the trader runs the risk of his sold option being exercised. If this happens, the purchased option holds value as well, and can be sold to offset the loss incurred by the sold option, or exercised side of the spread.

No Commissions to Close Successful Trades. The goal of a credit spread is for both the sold and the purchased option to expire worthless, allowing the trader to keep the full credit. Worthless spreada of course require no fees to be closed and hence do not incur commission zpreads. This element means increased net return on winning credit-spread trades.

Credit spreads are a conservative strategy with a hedging element to protect against major moves in the underlying vehicle. Because of this reduced selling credit spreads options trading system halted, reward is also capped. The Rare Loss Can Be Costly. In the instance of a loss, if the trader decides to close out the credit spread prior to expiration, he can incur up to four commission costs two commissions to enter tradibg trade and two commissions to exit the trade on the entire position, which adds to his loss.

Credit-spread returns may not be as great as straight call or put tgading, but the high winning percentage can be rewarding in halter, bear, and even range-bound trading environments. Filed Under: RecentTrading LessonsTrading Lessons ConnorsRSI is the first Quantified Momentum Indicator -- the next-generation improvement to traditional RSI indicators. At Connors Research, we are using it as an overlay to many of our best strategies to make them even better -- now you can, too. Enter your email address to get your FREE download of our Introduction to ConnorsRSI - 2nd Edition - Trading Strategy Guidebook with newly updated historical results.

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Option Trading: Credit Spreads


selling more options to collect premium and of credit spreads DEBIT SPREADS Source: OptionVue TRADING STRATEGIEScontinued. Learn options at your own pace with free, comprehensive courses. Get started! Online Courses · Options Talk Podcasts · Live Webinars · On-Demand Videos. Weekly Options Credit Spread Horror I had been trading credit spreads in Apple I’ve been buying 8 to 10 weeks out calls and selling weekly options.