Tips to trade a Credit Spread

sell a credit spread Credit Spread is very popular with traders. This strategy is also used by trader insiders. It is really simple and effective. It is explained in almost every at options trading seminar. Seminars people paid thousands of dollars to attend. Just like you, we are always looking for an easier, faster way to success and financial freedom. I would much rather learn from other peoples experience, than make my own mistakes too.

But really did not understand what they were talking about, with phrases like: Advance options, Iron Condors, and Credit Spreads. The terms scared me, and appeared at first glance to be complicated, or even risky. Boy was I wrong. Credit spreads, is a consistent, regular way to make monthly income. They are easy to learn and apply to your investing plan. I would stop trusting others with your money, and starting learning how to control your financial future today. What is it and how can you benefit from it?

 

Credit Spread Explained

A credit spread is an option spread strategy in which the premiums received from the the options you sold is greater than the premium you paid for the option you bought. It results in money being credited into the option trader’s account when the position is entered. The net credit received is also the maximum profit attainable when implementing the credit spread option strategy.

Markets are moving much. You may have the idea that an underlying will rise of fall. You will choose different strategies like bull credit spread or a bear put spread.

Bull Credit Spread

The bull put spread is the option strategy to employ when the option trader is bullish on the underlying security and wish to establish a vertical spread on a net credit.

Click on the pay-off diagram to learn more about the bull put spread strategy.
Bull Put Spread

Short Put Vertical Spread

A short put vertical spread is a bullish, defined risk strategy made up of a long and short put at different strikes in the same expiration.

Directional Assumption: Bullish

Setup:
– Sell OTM Put (closer to ATM)
– Buy OTM Put (further away from ATM)

Ideal Implied Volatility Environment: High

Max Profit: Credit received from opening trade

How to Calculate Breakeven(s): Short Put Strike – Credit Received

 

Bear Credit Spread

If instead, the option trader is bearish on the underlying security, a vertical spread can also be established on a net credit by implementing the bear call spread option strategy.

Click on the pay-off diagram to learn more about the bear call spread strategy.
Bear Call Spread

 

 

Short Call Vertical Spread

A short call vertical spread is a bearish, defined risk strategy made up of a long and short call at different strikes in the same expiration.

Directional Assumption: Bearish

Setup:
– Sell OTM Call (closer to ATM)
– Buy OTM Call (further away from ATM)

Ideal Implied Volatility Environment: High

Max Profit: Credit received from opening trade

How to Calculate Breakeven(s): Short call strike + credit received

Sell OTM Call Credit Spread in high IV environment. How to make money: if the stock goes down you make money of the short delta, If the stock goes up you make money of the volatility crush. What is the risk?  You may risk money because the magnitude of the move.

The strategies below we do not play much, because they are used in a low implied volatility environment. We prefer to sell options when IV is high so that we may receive much premium

When Implied volatility is not there we may play the Long Call Vertical Spread or the Long Put Vertical Spread

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