Credit Spread
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Credit Spread – Oh Boy, That’s Gonna Smart…

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Of all of the different option strategies out there, the credit spread technique is probably one of the most well-liked, the most talked about, one of the most used (or abused depending on how you look at it) – and perhaps the most harmful option approach of them all.

The thing is, when rookie option traders very first hear of this strategy – very few of them seem to be able to fight off the temptation to bounce right into trading them – with way too much actual hard earned dollars on the line – and way too little preparation, knowledge, and know-how.

And it appears that a great amount of them – if not nearly all of them – immediately wind up finding their groins bashed in, their heads chopped off, their eyes poked out, and getting really, very, badly hurt.

Now before you start to get the wrong impression here, please, let me clear up some thing.

I actually LOVE credit spreads.

I think they are an absolutely wonderful and excellent way to trade.

And all those reports and claims about generating five to ten percent a month even though barely taking any time looking at the marketplace – and how the possibilities are so unfairly on the side of the credit spread trader – and how trading credit spreads are just like being the ‘house’ as opposed to the gambler – yes – I believe and agree with all those claims and tales as well. Actually, not just do I agree and believe those claims – I KNOW they are accurate – mainly because I watch it happen first hand in my very own trading account on a standard basis.

The trouble is – there is something very large that’s getting left out of all those claims and testimonies – and this one large thing is causing way to many fresh faced ‘hypnotized’ option traders to misunderstand this technique correctly from the start – and in a way it’s actually encouraging them to leap thoughtlessly into trading them with quite inaccurate expectations.

See, even though it might be accurate that the credit spreads (and the iron condor strategy) can generate yields of over ten percent monthly, and that they favour the trader by offering higher probabilities of winning (in some situations as much as 80 and 90 percent) – what is just not getting talked about is the risk to reward ratio of these trades – which can regularly be as high as ten to 1.

10 to 1! Which means that in order to obtain those 80 to 90 % probability trades you might very well need to risk 10 dollars to create just a single dollar – or to be more accurate – you have to be willing to lose $10,000.00 for the chance to make just $1,000.00.

And as my dear mother used to say – ‘that’s an honest to goodness awful smelling spoiled rotten deal’.

Because as soon as you start to do the math you uncover the fact that even with those glorious monthly returns with 80 to 90 percent probability of winning – all it takes is just one problem month to arrive and induce a loss that may entirely obliterate the eight to nine wins you’ve accumulated – or worse – in addition it could also wind up cleaning out the rest of your account.

However – all isn’t lost…

As I mentioned earlier, I love the credit spread. And the iron condor trade as well.

And – I regularly make really good income from both of them.

So certainly there’s a way around those problematic losing months and that nasty risk to reward.

Of course there is.

It’s all in how you go about managing the trade.

See, so long as you learn the proper way to first put these trades on, then blend that with a very easy, uncomplicated management procedure (see below) and several simple adjustment tricks (see below) – this risk to reward ‘problem’ is absolutely eliminated and no longer any trouble.

You just need to take some time BEFORE you go slap on a credit spread or an iron condor – and arm your self with a little bit of our ‘spread trading insight’. Learn a couple of our ‘tricks of the trade’ – so when those tricky months DO arrive (and they definitely will believe me) – you will know EXACTLY what you must do to immediately crush out that danger, adjust yourself and your credit spread and/or iron condor out of the difficulty, and truly enjoy these trades for all they are ‘really’ cracked up to be.

To learn more about how to properly place, manage, and adjust these trades for consistent income, sign up for our free option trading newsletter by clicking here.

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Options Trading – Keeping It Simple


While options can seem to get very complicated very quickly – they certainly don’t need to be. A lot of investors can get turned off to options because they just think they are too complicated – too hard to understand. This isn’t true at all.

Part of this probably has to do with the fact that there are some very complicated strategies that can be used – or constructed with options. With all the various strikes and months and volatility levels that come into play – and trading strategy combinations with crazy sounding names like the reverse iron butterfly, the upside down double padded credit spread trade, the double month reverse iron condor, etc – bottom line it’s possible to do just about anything with options – and one can make it as complicated as they wish.

But again, it doesn’t have to be that way. Options can be very simple to understand and to use as part of your investing ‘toolbox’.

One very simple way to look at options is to simply look at utilizing options as a cheaper way to own stock. This is probably the easiest way to try to understand options trading – as well as perhaps one of the easier ways to use them.

For example – let’s take a look at GOOG stock. Currently GOOG is trading at around 578.00. If you wanted to own GOOG stock and try and take advantage of whatever direction you thought it would be heading – that would represent a significant amount of money you would need to put down in order to purchase say 100 shares. In order to buy 100 shares of GOOG stock at this level would cost you $57,800.00.

However, a ‘cheaper’ – or shall we say ‘more affordable’ way to own the equivalent of that 100 shares would be to simply purchase a Call Option for $27.60 – or – $2,760.00. By purchasing a call option – you now have control over 100 shares of GOOG stock – which for much much cheaper than if you were to purchase the actual shares – and you can participate in the price movement of GOOG shares.

This is probably the easiest of option strategies to understand and implement – and there are others as well which we will be getting into our upcoming series of option play articles.

One of these ‘simple’ option trading strategies is the credit spread – also known as the vertical spread – and although the names of these strategies might cause one to back off and prepare to run – you really shouldn’t. These option trading strategies are actually really simple and easy to understand once you just get a couple ‘housekeeping’ rules understood. And most importantly – they can be very profitable to trade – and a lot of fun.

Until next time – stay hedged – and keep tuned in here for more upcoming option trader talk – and as always – trade with confidence!

 

Option Strategies For All Investors


While option trading might not be for everyone out there – and some might consider more complex option strategies like the iron condor, the credit spread, weekly options spreads, and calendar spreads being to ‘complicated’ for the average retail trading crowd – I think that it is safe to say that there is a fairly wide group of people – or let’s say ‘retail traders’ or ‘investors’ – who could utilize options or as some might argue SHOULD use options to some lesser degree.

Along with the more ‘complicated’ strategies (that really are not that complicated) – there are numerous option trading strategies that are suitable to the more ‘conservative’ crowd.

For example, let’s take just the average person who  has a portfolio of stocks – or who might own just one or several stocks. This is their ‘investment’ – it is something of ‘value’. Now I would venture to guess that most of the other things that this person has in their life – for example their home – their car – perhaps some rare art – they have insurance on. They are willing to pay out some money in order to insure – or protect – these ‘assets’ from total loss.

Well what many of these people don’t understand is that they can ALSO protect their ‘stock’ investment in a similar way through the purchase of Put Options.

If one owned stock XYZ at 90 dollars – they could purchase a 90 Put – or a 85 dollar Put (or any strike Put) for a small outlay of money – and this Put option would act as insurance to protect their stock holding from significant loss.

What the put option does is the give the owner of the put – the ‘right’ to sell shares of the underlying at the strike price they own the put at. So, in our example above – if Joe Investor owns 100 shares of XYZ at 90 dollars – and they buy a 90 dollar put – no matter what happens during the length of time that they own that 90 dollar put option – they are guaranteed to be able to sell their 100 shares of stock for 90 dollars (through use of the put option).

Iron Condor – I Want My Life Back


Iron Condor trading article on when to remove spreads from a position – how to potentially double up on expected trade profit – and taking a ‘trading vacation’ every month. See iron condor article here

Credit Spread Video Course


This Video Will Show You A Brand New *Better* Way To Trade The Credit Spread For Income – Along With A Whole ‘Slew’ Of New Option Cashflow Strategies That Can Be Traded To Generate Income – Spending As Little As 15 Minutes A Day…

The credit spread strategy is used by option traders ideally in non trending situations. The spread takes advantage of theta decay in options – as the day progress moving towards expiration day, all options are losing value – and in the case of the credit spread strategy – as long as the ‘sold’ strikes of the trade are placed well out of harms way (of the underlying reaching or ‘breaching’ them) these trades can usually expire worthless allowing the iron condor trader to keep the entire premium received.

Iron Condors are built from 2 individual credit spreads – one on either side – once again, placed as far out of harms reach (of the underlying touching or moving through them) as possible while still bringing in a respectable credit.
Placed above the stocks current price is a bear call credit spread – usually positioned at least one standard deviation away from the underlyings current value. Below the iron condor investor places a bull put spread credit spread – also usually at least one standard deviation away from the stocks current trading price.
During the duration of the trade, the underlying can fluctuate around just as long as it doesn’t do so too wildly – and just as long as it remains within the predetermined ‘range’ created by the sold credit spreads on either side.
This type of option spread can carry with it an extremely high probability of winning as in most months the underlying, if chosen correctly, should not too far away from it’s current position. In the months where the underlying DOES begin to move too far, too fast – the trader managing these positions should have an adjustment plan in place to contain and cut short losses – which can be significant with these types of trades due to the high probability of winning / poor risk to reward set ups. However, if one does understand the proper way to manage and adjust the iron condor trade during it’s few seldom months per year – this type of trading can be extremely rewarding.

The iron condor strategy is used by option traders ideally in non trending situations. The spread takes advantage of theta decay in options – as the day progress moving towards expiration day, all options are losing value – and in the case of the iron condor strategy – as long as the ‘sold’ strikes of the trade are placed well out of harms way (of the underlying reaching or ‘breaching’ them) these trades can usually expire worthless allowing the iron condor trader to keep the entire premium received.

Iron Condors are built from 2 individual credit spreads – one on either side – once again, placed as far out of harms reach (of the underlying touching or moving through them) as possible while still bringing in a respectable credit.

Placed above the stocks current price is a bear call credit spread – usually positioned at least one standard deviation away from the underlyings current value. Below the iron condor investor places a bull put spread credit spread – also usually at least one standard deviation away from the stocks current trading price.

During the duration of the trade, the underlying can fluctuate around just as long as it doesn’t do so too wildly – and just as long as it remains within the predetermined ‘range’ created by the sold credit spreads on either side.

This type of option spread can carry with it an extremely high probability of winning as in most months the underlying, if chosen correctly, should not too far away from it’s current position. In the months where the underlying DOES begin to move too far, too fast – the trader managing these positions should have an adjustment plan in place to contain and cut short losses – which can be significant with these types of trades due to the high probability of winning / poor risk to reward set ups. However, if one does understand the proper way to manage and adjust the iron condor trade during it’s few seldom months per year – this type of trading can be extremely rewarding.

20 Minute Credit Spread Profit


When the market tanked on Thurs – May 6, 2010 – the VIX spiked over 40 and the vols soared. Then the market bounced back up pretty quickly, and around 20 minutes before the close, talk started coming out on the networks that the huge drop was due to some ‘fat finger’ error by some overweight guy at some trading firm. As soon as this rumor started circulating on the networks it felt like immediately the volatility levels began shrinking back down – giving us the opportunity to quickly throw on a split strike iron butterfly trade to see if we could take advantage of those sinking vols. This was with about 20 minutes left before the market close. (The split strike iron butterfly could also be considered an iron condor – or two separate credit spread)

Within about 15 minutes of putting this trade on – this trade had a profit of 2.5%. We closed it at this point – with 5 minutes left before market closing. Even though we closed it – we continued to monitor it as if we had left it on – and as the bell rang to close the market the trade was up another 2.5% for a total possible profit (had we held on until market close) of about 5% gain in around 20 minutes.

Picture-20
The screen shot above was taken as market closed on Thurs. This iron butterfly was placed at even money about 20 minutes earlier. Due to the vols falling back down after the huge drop, this trade shows a 5% profit made in about 20 minutes.

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20 Million Dollar Day (according to TOS anyway)


Today when the market went nuts (dow dropping 1000 points) our TOS platform started acting haywire. Risk graphs were creating crazy formations for awhile there, then our net liquidating value suddenly said we had over 20 million dollars available.

Tried as I might, I was never able to  liquidate any of that before it corrected itself and went back to showing the actual correct sum. Unfortunate really…

However, through out that huge drop, our Iron Butterfly trade did amazingly well.

About 2 hours prior to the craziness starting our position was down around $100.00.

With the market moving down we added a bear side adjustment. Then when everything hit the fan, even though we were well outside our profit tent area, the vols took this trade from what started as a $100.00 loss to over $1000.00 profit. See risk graph below…

credit spread

Hedged Iron Butterfly During Dows 1000 Point Drop – May 6, 2010


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Credit Spread – Collar


New article from the people at ‘O’ on the ‘Appreciating Collar‘. If you haven’t read the book from R-Walk on this trade, could be worth a look. There is also a good video on a similar ‘married put’ strategy found in our option course as well as some unique and new ‘rules’ for when to cash in puts and re hedge underneath. Learn more by watching our free option income trading video.

Option Spread Strategies


Majorly unhealthy.

There are numerous option spread strategies non directional option traders can use to profit from the market without having to ‘know’ or be necessarily ‘correct’ about market and/or stock direction.

These include the iron condor, the butterfly spread, the diagonal and the double diagonal, the calendar spread – the double calendar spread – and, the credit spread (also know as a vertical spread).

The credit spread can actually be found hidden within many of the above mentioned option spread strategies. For example, the iron condor is created from two individual and separate credit spreads – a put credit spread positioned down under where the stock being used is trading at – and a call credit spread put on up above where the underlying is ticking at.

The credit spread can also be found in the butterfly spread. It is the upper half of the ‘regular call’ or ‘traditional’ call butterfly – is the lower half of the put butterfly – and the iron butterfly is comprised from 2 credit spreads – both a put spread and a call spread.

FREE VIDEOS – Option Income Video Course – CLICK HERE

Creative Commons License photo credit: hiwarz

Bull Put Credit Spreads


Burface

The credit spread option strategy can be played with either call options or put options. A credit spread / vertical spread placed with calls is called a bear call spread – while those that are placed with puts are called bull put credit spreads.

An example of a bull put credit spread would resemble the following…

Sell 1 XYZ Stock 50 Put Option
Buy 1 XYZ Stock 45 Put Option

This is a bullish play – as the option seller placing this trade is of the opinion that XYZ stock will be either remaining nuetral over the next however many days there are to expiration – or that XYZ will be bullish.

As long as the investor is correct and XYZ remains above the 50 dollar strike price by expiration day, the trade will be a winner and the trader will be able to keep the credit that brought into their account upon the initiation of the trade.

This traded is called a bull put spread because even though it is a trade using put options – it is done so in a way that benefits if the stock or underlying proceeds in a bullish manner.

Creative Commons License photo credit: Furryscaly

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