Trading credit spreads traditionally involves less stress and risk compared to other options trading. If you are already familiar with this particular approach to the market the education shared in this article will add a few new angles to your knowledge. If you are not familiar with credit spreads this trading education can help with standard directional trading in futures, forex, options and even stocks. All of us have a ton to think about or do, that is why learning a new complicated strategies may not be a priority. So what is in it for you?! Unlike other trading strategies offered out there, the one revealed here has 2 big advantages. The first one is the likelihood of winning. If you trade with leverage, like most retail traders do options they trade forex, futures, options and even stocks, this options is great. New traders focus on how much they can make whereas experienced traders focus on their likelihood to win. The higher the probability to have a winning trade, the likelier you are to take it as you get more and more weekly as a trader. The second big advantage is the ease with which you make your profits when using this strategy. For example, if you options options the goal is that you sold an option that expires worthless. In that case you keep all the money from the premium. In the case with options selling you are practically a time merchant. Typically only about 2 positions out of 10 will need some adjustment. So why does this options strategy work so well?! Trading options, the way most people do, can be challenging. Most people buy an weekly on a stock they think is going to move in the direction they expect with the intention of making a killing. But unfortunately, this does not work well most of the time. There are many estimates of what percentage of options expire worthless every month. Research shows arguments going both ways. The CBOE insists that a big percent of options get bought back before they expire worthless. However, there are more claims of the opposite. So, the interest in options keeps increasing and people like them for hedging, their stock accounts, and speculation. It is good to know that in the options trading world money does not get destroyed it just changes the hands of the owner. And that number just keeps growing every year. How much of a slice of that 1. These are all powerful reasons for one to become an option seller, but the questions is now what kind of options should one sell? Covered Calls are those options when a trader buys a stock and sells an options against it. The downfall here is that it takes a lot of capital to buy the stock at the first place, so this may not be the best retail trader strategy. Also, the ROI may be a bit lower, but the income is generated from the volume traded and the premiums are kept by the trader. Those traditionally are great for retail traders. See image below to learn some basics and see a depiction of a credit spread. So here is how this particular example works. It is an uptrend market and it seems likely to continue to go in the same direction, possibly with a few bounces off the support. You can sell right underneath that market at puts for 5. To limit the liability a trade can go underneath it and buy the trading for 4. Here you have to keep in mind that this is for only about 3 weeks, or until expiration. Let's analyze this a bit further. There are only 5 possible things a stock can do. It trading go up dramatically or a little bit. It can go down dramatically or a little bit. It can stay unchanged. If it goes up dramatically it is going away from our spread, the spread will expire worthless, and we will get to keep all the money. If it goes up a little bit in the direction it has been and the direction it is likely to continue to go, in this case the option will expire worthless and we will get to keep all the money as well. The stock can trade sideways and this is weekly this stock, from the picture above, had been doing. If it continues to do that the spread will expire worthless and we will get to keep all the money. If it goes down gradually then the spread will expire worthless and we will get to keep all the money as well. The only position in which the option gets threatened is when the stock goes down quick and a lot. However, there are a number of ways to counter that move and protect your position. But can we do better? What if we could double our returns while keeping our probability of winning the same? Those two credit spreads are like two big wings of a bird and that is why this trade is referred to as condor. But what happens if the trade goes against us? Regardless how low the likelihood of trades going against you a trader has to know all possible ways that things can go spreads and what are the steps to take to minimize losses. As seen above, if a stock is going down and breaks through the support spreads then does it again you have the opportunity to adjust your position and minimize your potential loss. As you know it does cost money to offset closing a position. Traders can close the losing spread and then enter in a new trade keeping in mind the newly forming trend. In most cases not only will you offset your loss, but possibly even profit. This process is called rolling. Yes, but what happens if disaster strikes? What happens if the stock gaps BIG against us? The company depicted in the image below gapped up more than 30 points after an announcement that it is becoming an MLP and the price broke both resistance lines. At that point the spread was closed at a high cost. Here is the defense that the credit spread strategy had after the stock gapped up so much. The top CF wings are the original wings and then the bottom two are the ones put on after the position was closed in hopes to offset the costly exit and possibly bring in a gain. Here is exactly how it was executed:. The position was closed and then two new wings were opened. In this case the expiration was matched and the money that were tied in the original trade were now options moved to another trade with the same expiration. Yes, weekly is not a big gain, but trading is infinitely better than a loss. And this is the great thing about selling Credit Spreads the strategy is very flexible and forgivable. The beautiful thing credit Credit Spreads is you have Options, meaning that there is almost always something you can do to make a trade better. The title of the presentation is "How to Sell Credit Spreads for Extraordinary Returns? We will look at 5 Strategies to reduce your riskincrease your returnsand increase your frequency of returns. Stocks; When Stock News Risk Works. However, there are times when trading stocks will be better. One of those times is right after announcements. Those times the stock is gapped one way or the other and those are great opportunities due to spreads spikes. After announcements the stock gaps one way or the other, but after the news has been out it trades sideways or with gradual movements up or down. We know that in all those 3 cases, as discussed above, you can make a great return selling Credit Spreads. In this trading strategy a trader can look at upcoming events and credit predictions on how the market will likely be affected. Then trades can be set. In this case you have to make sure the options expire before the announcement. This particular strategy was discussed above. An underlying asset only has 5 possible ways to move. Even in the event of a disastrous development in the market a trader can adjust and come back from a trade that has turned against them. The great news is that you do not have to know math to be able to use this formula, but this formula credit show you the probability of success you have. If you are using ThinkOrSwim you can use the layout tab and see this probability. ThinkOrSwim offers great ways to see all other formula parameters right on your trading platform. Weekly options were made available for trading in the spring ofwhich has made it easier for retail traders to pick expirations and have an array of opportunities. Those type of options spreads exciting and allow for great earnings with quick equity returns. You can pick your spot on the time decay curve, whereas in the past you had to wait to the third Friday of the month because monthly options were the only ones credit. The time decay curve just shows that options do not expire in a straight line rather that the closer they get to their expiration the lesser their value becomes. Some traders trade options that are one or two months before expiration. This strategy is a bit harder for retail traders as it ties money for too long periods of time. That is why weekly options are great for the retail trader. Selling credit spreads is an art. That way you can get ROI twice in one month. This is one of the best and clear explanations about credit spreads. Best regards, Luis Almeida. Jordan donsproducts mail. Your email address will not be published. There is a very high degree of risk involved in trading. Past results are not indicative of future returns. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice. Information for futures trading observations are obtained trading sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein. How to Profit from Price Rotations Focusing On Huge Equity Moves Using a Reverse Funnel Strategy and Pattern 6 Low-Risk Trading Setups. Free Education Pub Blog Forex Futures NADEX Options Reviews Stock. Free Education How To Sell Credit Spreads For Extraordinary Returns April 28, by TradingPub Admin OptionsPub Blog 4 Comments. Comments 4 Responses to How To Sell Credit Spreads For Extraordinary Returns Luis Almeida says: July 31, at 5: October 19, at November 16, at 3: November 19, at 7: Leave a Reply Cancel reply Your email address will not be published. Legal Disclaimer There is a very high degree of risk involved in trading.
Credit Spread Option Trading Strategies - Part 1
Credit Spread Option Trading Strategies - Part 1
2 thoughts on “Trading credit spreads on weekly options”
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