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