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.

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.

This post is from: Credit Spread

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…

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

This post is from: Credit Spread

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.

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photo credit: hiwarz

This post is from: Credit Spread

When discussing option spread strategies, the opposite of the option credit spread is the option debit spread.

While credit spread option techniques bring premiums in the form of credits INTO a traders account, debit spreads do just the opposite as the title of this method suggests – it pulls a debit out of the account. Also – generally when credit spread are used, the investor believes – or at least ‘hopes’ that the vehicle being used will move in the opposite direction of the options being used.

For example – if a non directional trading person had the opinion a particular stock would move downwards, they might put on a call credit spread – in hopes that the underlying moves down and away from that sold call spread,

In the case of debit spreads, the trader who is utilizing this spread option either believes or hopes that the stock or ETF being used will move towards the direction of the options being used in the vertical spreads.

For example, in the trader has the opinion that a specific stock will be heading higher, instead of SELLING a call credit spread – that trader would instead BUY a call debit spread – or a bull call spread – which would then profit if a move higher did in fact happen.

Let’s look at an illustration of a call debit spread:

Buy 4 GLD 110 Calls
Sell 4 GLD 115 Calls

The debit – or the ‘cost’ of this trade is the difference between the two strikes of the trade. This trade profits when the underlying being used moves bullishly.

photo credit: petesimon

This post is from: Credit Spread

The bull put spread is one of the option spread strategies that option traders utilize either as a stand alone method to capture profits from a bullish stock, index, or ETF – or – it is a ‘component’ of one to several other option spread strategies – for instance the iron condor option, the butterfly spread, etc.

A bull put spread is composed of the sale of a put option and the purchase of a put option. In most cases, non directional trading participants who use this method will select the strike at which they sell their put option either near the money – or out of the money – below from where the market presently resides.

The trader will then acquire or purchase a put option below the level at which they sold – even further out of the money. The purpose of this purchased option is to ‘cover’ – or protect – the option which they sold – from significant losses if the vehicle being traded where to crash through the short put.

When this trade is initiated – it will immediately give off a credit into the traders account – and this credit is the difference between the option sold and the option that was purchased.

As the trade progresses and time begins to chip away at the the options (remember that options decay over time) as long as the stock being traded remains above the strike price level sold – the difference in prices between the sold option and the purchased option becomes narrower and narrower – finally reaching a point where the trader can purchase the bull put spread back for less than what it was sold for – or simply allow it to completely expire worthless on expiration day.

photo credit: temporalata

This post is from: Credit Spread

The put spread is one of the option spread strategies that can serve several different purposes. First however, let’s take a quick look at just what a put spread is. Here is an illustration -

Sell 7 DIA Strike 100 Puts Options
Buy 7 DIA Strike 99 Puts Options

This option spread will bring a credit into the traders brokerage account right away. That credit will be the difference between the executed prices of the two different spreads. This trade will make the trader profits as long as DIA does not breach the 100 level before or at the end of the expiration cycle. If the underlying DIA stays above the 100 price level through expiration – this trade can be profitable.

Probably the main way non directional trading investors utilize the put spread is in the way described above. It is used as a way to generate consistent profits – and the trades are placed because the investor believes the asset being traded will remain above the selected levels.

However, another way the put spread can be traded is if the investor wishes to purchase the underlying stock or index – however not necessarily at the levels where it is currently trading at. For example – let’s say that DIA is trading at 105. The trader would like to own shares of DIA – just not at 105 per share. However, the trader WOULD like to purchase DIA if it were trading at 100 per share. This would be a bargain.

So, the trader could sell a DIA 100 put and bring some premium into his / her account. If before expiration DIA drops below the 100 level, the trader could have the shares of DIA assigned – allowing the trader to not only get the stock at or around the 100 price he wished for – but in addition the trader also is able to keep the original premium brought into the account.

The above scenario is also referred to as ‘going naked’ – because the 100 puts were sold naked – or without any other asset to ‘cover’ them.

However – if the trader going ‘naked’ want to acquire some insurance just to make sure that DIA didn’t drop to 0 during the duration of the trade – instead of just selling the 100 puts naked – the trader could sell a put spread – selling the 100 put and buying a 99 put. This still brings a credit into the account – still allows the trader to purchase DIA at the 100 level if it drops there, it just in addition provides the trader with insurance from a catastrophic crash type scenario.

photo credit: Daran Kandasamy

This post is from: Credit Spread

There are a number of option spread strategies non directional trading investors can use to generate consistent income from the markets. These include: option credit spread, iron condor spread, butterfly option, diagonal spread, calendar spread, etc.

One of the more simple – or easier to understand spread option strategies is the credit spread – or the ‘vertical spreads’.

This trade can be used to generate passive income from the market while the one putting the bull put spread or bear call spread doesn’t have to be exactly ‘right’ about which way the underlying is headed.

With the option credit spread trader – say he puts on a bull put spread – which is the sale of a put option below where the stock is immediately trading at – and then the purchase of a put even further below.

With this trade, it can be profitable if the underlying asset goes up, goes nowhere, or even goes down a little. The only way this trade could realize losses is if the asset drops significantly – and even in that situation there are measures that can be taken to ‘adjust’ the position.

photo credit: dunzki

This post is from: Credit Spread

Perhaps my favorite option spread strategy is the credit spread – or sometimes also referred to as the vertical spreads.

The option credit spread is a basic building block option position for other option strategies, such the iron condor spread and
the butterfly spread.

This position is made up of a sale of one option and the purchase of another option (both need to be calls or puts) to ‘cover’ it. For example, a call credit spread on IBM might look as the following spread option example shows:

Sell 1 125 call
Buy 1 30 call

What the non directional trading investor in the above example is trying to accomplish is to sell the premium in the 125 call for more than is paid for with the 130 call.

Then, as time goes by and the option start to decay, as long as IBM remains below the 125 level – at some point the credit spread trader can close the position for profit – or simply wait until the end of the expiration cycle and let the options expire worthless – assuming of course that IBM never breaches the 125 level before options expiration.

photo credit: sarniebill1

This post is from: Credit Spread