| The Stock Market is one of the largest markets in | | | | with a maximum 4-6 weeks to expiry is where we |
| the world, so it is going to be around for a long time. | | | | want to be. Sometimes you can even enter with |
| This means that if we can master a few strategies | | | | under 2 weeks to expiry and keep your credit much |
| that bring consistent profits, it is not inconceivable | | | | quicker, but you need to be more certain about the |
| that we could set ourselves up with a reliable income | | | | short term direction the share will move to do this, |
| stream. The fact is, one of the most profitable skills | | | | because your time frame is shorter. |
| we can ever master, is the skill of option trading. | | | | So why are Credit Spreads so advantageous? |
| There are many option trading strategies "out there" | | | | Essentially, in a given time frame, the market can |
| such as strangles, straddles, bullish call debit spreads, | | | | only move one of five ways: |
| bearish put debit spreads, ratio backspreads, calendar | | | | 1. A small move upwards |
| spreads and credit spreads. In this article, I would like | | | | 2. A small move downwards |
| to focus on the superior advantages of option Credit | | | | 3. A side ways move - i.e. in a given time frame, the |
| Spreads. With the flexibility and power of Credit | | | | market price "goes practically nowhere" or before |
| Spreads, you can safely trade options for the rest of | | | | that timeframe expires, returns to its original point. |
| your life. | | | | 4. A large move upwards |
| First, let us define option credit spreads. They are | | | | 5. A large move downwards |
| called such because when they are created, they put | | | | If you've taken out a credit spread, the market can |
| a "credit" into your trading account, as opposed to a | | | | move any four of the above five ways and you |
| "debit" which normally occures when you are paying | | | | make a profit. Even if the unfortunate happens and |
| for a stock or its derivative. If, by the time the | | | | that unlucky "fifth" way occurs, you can act to either |
| options in the credit spread expire, the share price | | | | delay your profit, by "rolling out" or "rolling |
| hasn't breached a certain level, you get to keep the | | | | out-and-down" your positions to a later expiry date |
| "credited" funds. | | | | and/or lower strike prices, waiting for the market to |
| The reason it creates a credit and not a debit, is | | | | return to a profitable position - or sometimes if the |
| because you're SELLING an option at a strike price | | | | new market direction is evident (lower highs |
| which is closer to the current share price, but so as | | | | confirmed) and you are onto it early enough, you can |
| not to leave yourself exposed, you limit your risk by | | | | buy back your sold option and still make enough on |
| BUYING the same number of option contracts at a | | | | the bought option to either break even or make a |
| strike price further away, both having the same | | | | small profit. You could even sell a call option credit |
| expiry date. The "sold" option, being closer to "the | | | | spread in the meantime. Wonderful flexibility! |
| money" (share price), is more valuable than the | | | | This is why Credit Spreads are so advantageous. |
| "bought" option and so you receive a credit. | | | | Firstly, 80 hits you, you can still come out unscathed |
| The trick here, is to sell option credit spreads with a | | | | or even profitable. |
| short time to expiry, thus taking advantage of the | | | | You can do both put option credit spreads or call |
| "time decay" factor in options. Options have a time | | | | option credit spreads, depending on your view of a |
| decay which falls away exponentially the closer the | | | | market. But either way, there are some factors you |
| expiry date approaches, so creating a credit spread | | | | need to take into consideration. |