🐺Making Credit Spread Options Trading as Easy as the ABC's

Hey there! My name is Nate and I write about trading for the WOLF Financial newsletter. If you are looking for more trading tips and tricks, I guarantee you’ll enjoy my content on 𝕏, @tradernatehere. Thanks for reading!

This service is for general informational and educational purposes only and is not intended to constitute legal, tax, accounting or investment advice. These are my opinions and observations only. I am not a financial advisor.

After diving into the world of Debit Spreads last week, it only makes sense to follow up with Credit Spreads.

If you like to use options to collect cash but do not want to own 100 shares for the covered call strategy, credit spreads might be of interest.

If you have also been interested in cash secured puts but do not like the idea of locking up so much cash, credit spreads might again be the solution.

This strategy can provide you with immediate cash in your account with clearly defined risk without a need to consider additional losses.

It is time to get a better understanding of credit spreads.

What Are Credit Spreads?

In options trading, a credit spread is a strategy where you simultaneously buy and sell options of the same class (calls or puts).

These options will have different strike prices and/or expiration dates.

The goal is to collect a "credit" or premium from the options sold, which is higher than the cost of the options bought.

You are collecting cash that goes directly into your account the second you enter the trade.

There are two types of credit spreads: the Bull Put Spread and the Bear Call Spread.

Bull Put Spread

This strategy involves selling a put option (the higher strike) and buying another put option (the lower strike) on the same stock with the same expiration date.

This strategy is used when the trader is bullish on the asset's price.

For example, you might believe TSLA is ready to move higher and want to use the Bull Put Spread strategy.

You might consider selling the $160 strike put while buying the $155 strike with the same expiration date to cap your potential losses.

If shares remain above $160 you will keep the cash collected as the options expire out of the money.

If shares drop to $155, you will owe the difference between strike prices which would be $500 per contract. But you will offset that cost by the premium you collect up front.

Bear Call Spread

This strategy involves selling a call option (the lower strike) and buying another call option (the higher strike) on the same stock with the same expiration date.

This strategy is used when you are bearish on the stocks price.

If you are bearish on MARA in the near term, this strategy might be something to consider.

You could sell the $24 strike call options and buy the $25 strike, collecting a nice premium while only risking $100 if the trade goes against you.

Advantages of Credit Spreads

1. Defined Risk: One of the biggest advantages of credit spreads is that they offer defined risk. The maximum loss is limited to the difference between the strike prices of the two options, minus the net premium received.

2. Profit in Various Market Conditions: Credit spreads can generate profit in a variety of market conditions. Whether the market is bullish, bearish, or even neutral, there's a credit spread strategy that can work.

3. Premium Collection: With credit spreads, you're the one collecting the premium, not paying it. This can provide a steady income stream, especially if you're selling options that expire worthless.

Disadvantages of Credit Spreads

1. Limited Profit Potential: While the risk is defined with credit spreads, so is the profit. The maximum profit you can make is the net premium received when entering the trade.

2. Risk of Early Assignment: There's always a risk of early assignment with credit spreads. If the option you sold is in-the-money, the holder may exercise it before expiration.

Credit spreads can be a powerful tool in your trading arsenal.

They offer defined risk, the ability to profit in various market conditions, and a way to collect premium.

However, they also come with limitations, including capped profits and the risk of early assignment.

As with any trading strategy, it's crucial to understand how credit spreads work and to use them in the right market conditions.

When it comes to generating income, this is a favorite for many traders.

-Nate

 @tradernatehere