Credit Spreads: A Useful Strategy in Volatile Markets
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Last week, I started a mini-series on the various aspects of options trading. In the first few articles, I addressed “Calculating Returns” and “Setting up the Proper Risk/Reward.” Today’s focus will be on analyzing profit and probability.
In this installment, I’ll cover the use of credit spreads — a useful volatile market strategy — which Options360 has been using more frequently in the past weeks. There are some positions that you don’t need to take many actions on, with the exception of exhibiting patience.
I’m talking about positions in which a spread is sold for a credit. If the value of the options declines, a profit can be realized. The profit is limited to the sale price or premium collected. The maximum profit would be realized if the option expires worthless.
Typically, credit positions involve puts, calls, or a combination of both that have strikes that are out-of-the-money. Meaning, the options have no intrinsic value; entirely comprised of premium. In this sense, the seller, or options “writer” is acting like an insurance company; you collect the premium but also assume the risk of making a large payout or loss; if there’s an adverse event.
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Category: The Spread Trader
