Best way to sell a put spread
With selling a naked put there is more risk and a lot of buying power reduction, you rather sell a put spread. People sell a put so that you receive option premium. They hope that the option will expire worthless or that you can buy it back for a smaller prise.
A put spread is created when you sell a put and buy a lower put. The Options have the same expiration date but different strikes. A put spread also know as a vertical spread will be sold for a credit.
A vertical spread, as used on the site, is primarily a directional play. A vertical spread that is positive or negative delta will remain so no matter where stock moves. Unless one of the options is at-the-money and the other far from it, changes in volatility will not have a huge effect on a vertical spread.
Why use a put spread?
There are a few reasons you might use a put spread rather than simply selling a naked put. For one, vertical spreads have limited risk. The most you can lose on a credit spread is the difference between the two strikes minus the credit received. The flip side of this mitigated risk is that profits too are limited.
A put spread ties up a lot of buying power reduction. Sell a few point put spread or if you like to take more risk buy a protective 5 delta put you have to put up far less money. This money helps you to create more trades in your (IRA) account. So, You can make more profitable trades over the years. This adds up significantly.
How to Set up the trade
- Choose options with High Implied Volatility
- Sell a put
- Buy a put with a lower strike price
- You’re bullish. You may also be anticipating neutral activity
- Option has a probability of 33% in the money.
- Choose options with 35-55 days to expiration.
- Sell options 65% Out of The Money
- Collect around 1/3 of the width of the strike
- Do price discovery: enter the price above the mid price. If you are not filled route your trade to a different exchange
- Potential profit is limited to the net credit you receive when you set up the strategy.
- Manage the trade at 50% of maximum profit.
Risk is limited to the difference between strike A and strike B, minus the net credit received.
Read more at: optionsplaybook
Video on Put Spread
While this is a live recording they first discuss the current market.