Credit Spread Option


A credit spread in a simple option trade in which the trader sells one option and buys another option farther away from the money. This results in a credit to the trader. This credit is the max amount that can be made on the trade and is deposited into the traders account as soon as the trade is made.

Stocks, futures and binary options trading discussed on this website can be considered High-Risk Trading Operations and their execution can be very risky and may result in significant losses or even in a total loss of all funds on your account.

Credit Spreads - Introduction

The goal of the credit spread is to produce a net credit – this is your income, and you cannot make any more money than the credit you bring in. The credit is produced because the premium you pay when you purchase the option is lower than the premium you receive when the option is sold.

Most investors would go for the bigger piece of the pie, instead of going for the sure thing. But as they say, a bird in the hand is worth two in the bush. Take the sure thing every time. Do not extend yourself. Keep it simple and small and you will grow rich reliably. Back to the trade. Basically, IWM could have moved 9. This margin is the true power of options.

The trade allowed IWM to move lower, sideways or even 9. So, selling and buying these two calls essentially gave me a high probability of success — because I am betting that IWM would not rise over 10 percent over the next 32 days. However, I did not have to wait. IWM collapsed further and helped the trade to reap 10 percent of the 12 percent max return on the trade.

With only 2 percent left of value in the trade it was time to lock in the 10 percent profit and move on to another trade. I am always looking to lock in a profit and to take unneeded risk off the table especially if better opportunities are available. I bought back the credit spread by doing the following:. The ETF was range-bound, so committing to a big directional play higher or lower was a high risk decision.

I preferred to make a low-risk, non-directional investment, using credit spreads. As I have said before, we can also use range-bound markets to make a profit. How can credit spreads allow us to take advantage of a market, and specifically this ETF, that has basically stayed flat for seven months?

Well, knowing that the market has traded in a range for the last seven months we can use this as our guideline for our position. The trade allows IWM to move lower, sideways or 7. Inherently, credit spreads mean time decay is your friend. Most options traders lose value as the underlying index moves closer to expirations.

Every level of investor will learn something from watching this insightful presentation. Click here to watch this course now. Published by Wyatt Investment Research at www. Ian Wyatt Cannabis Stocks. A Roaring Alternative to Short Selling. Vertical Spreads Option Spreads: Debit Spreads Structure Option Spreads: Credit Spreads Structure Option Spreads: Horizontal Spreads Option Spreads: Diagonal Spreads Option Spreads: Vertical bear call credit spread.

Knowing which option spread strategy to use in different market conditions can significantly improve your odds of success in options trading. Futures investors flock to spreads because they hold true to fundamental market factors. A bull call spread is an option strategy that involves the purchase of a call option and the simultaneous sale of another option. A bear put spread entails the purchase of a put option and the simultaneous sale of another put with the same expiration but a lower strike price.

It's very important for every investor to learn how to calculate the bid-ask spread and factor this figure when making investment decisions. Learn how spreads play a significant factor in profitable forex trading.