Wednesday, December 19, 2018
Text size
Saturday, 04 May 2013 06:37

what are credit spreads?

Written by 
Rate this item
(1 Vote)

credit spreads - low risk option trading

why not to give yourself 80 percent trading edge by making use of option “time decay” to your benefit with credit spreads. stock market will not finish in near future because it is one of the major markets in the whole world. one can understand from here that mastering some basic profit earning strategies in stock market can easily make us able to set a constant and dependable income source.  do you know the skill that can earn you lots of profits? well that is option trading.

read more

there are more than one trading strategies in the market and few of them are bulleted below:
•    strangles
•    straddles
•    bullish call debit spreads
•    bearish put debit spreads
•    ratio backspreads
•    calendar spreads
•    credit spreads

this article emphasizes on the main advantage of option credit spreads.  this option is very flexible and thus allows you to trade options without any danger, for long time.

what is option credit spreads? they are termed like this because they add credit in your account on their creation. this is opposite to debit which normally occurs when it comes time to pay for a stock or its derivative. what if the options in the credit spread expire? well you can still keep the credited funds if the share price has not crossed a certain level.

you must be thinking why it creates credit and not debit. the reason is you are selling an option at a strike price which is not far away from the on-going share price. to not create difficulties for yourself, you minimize your risk by buying the same number of option contracts at a strike price further away, both having the same expiry date. we can summarize it as, selling option is better than buying option, if it is closer to the money and that is when you receive credit.

you should know taking advantage of the time decay factor and it is possible if you open the spread with very little time to expiry. do you know that time decay falls exponentially and more steeply as the expiry date comes closer? because of this you should create spread just before a month to expiry. you can do this even before 2 weeks to expiry as it will assist you in keeping your credit much quicker. in this case, your time period will be very short and you will be required to get surer about the short term direction the share will move.

why are option credit spreads so beneficial?

following are the five points that tell the way in which market can move in any given time period. you will observe only one of the five ways in given time span:

1.    a little move upwards
2.    a small move downwards
3.    a side ways move - i.e. in a given time span, the market price "goes practically in no specific direction" or before that timeframe expires, returns to its original point.
4.    a big move upwards
5.    a huge move downwards

you are lucky if you have opened one of these spreads as the market then can move in any four ways and the profit will be yours. you can still save yourself if the market goes the unlucky fifth way, but how? you can simply delay your profits by rolling out or rolling out and down your positions to a later expiry date and/or lower strike prices. you can carry this on until the market comes to somewhat stable and profitable positions.

what else one would wish for? no matter in which way market moves, you will be safe and earning profits.

you should also know money and risk management to make yourself more safe and lucky.

Read 1127 times Last modified on Thursday, 01 August 2013 10:58
More in this category: day trading using options »

Pick a Market

Contributing Editors

  • adrian muller has conducted seminars for the chicago board of trade, including a key series in 1999 which cautioned about a top in the equity markets (see his article “top experts and statistics on the dow”). adrian muller has appeared on cable tv financial programs with analysis on the futures markets and equity market directional forecasts. he has been quoted in barron's, the wall street journal, and futures magazine.

Featured Articles

Login to the Contributor Network