| Credit Spread - Monthly Cashflow Generator |
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| Written by Ten Nino |
| Saturday, 30 October 2010 13:22 |
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A preferred non directional trading strategy is the option Credit Spread. This strategy is one of the easier option spreads to comprehend for newer option traders. In addition it is simple to place and there is not much to do management wise while the trade is in play - which allows the credit spread trader to be freed from their trading chair and not have to watch every up tick and down that the market makes all day.
A preferred non directional trading strategy is the option Credit Spread. This strategy is one of the easier option spreads to comprehend for newer option traders. In addition it is simple to place and there is not much to do management wise while the trade is in play - which allows the credit spread trader to be freed from their trading chair and not have to watch every up tick and down that the market makes all day. The credit spread is a fundamental element to numerous other option spread strategies including the iron condor, the butterfly spread, the double diagonal and others. It if fairly common for beginning option traders to gravitate to this strategy soon after discovering options and once they have gotten their feet wet with the purchase of straight calls and puts, then covered calls, and debit spreads. Option traders love to trade this strategy because the way these trades are constructed can allow the trader to be wrong and still make money. If the trader creates a particular credit spread position, he or she can win if the stock or index being traded winds up doing three out of four possible scenarios. If the stock goes down, the trader makes money. If the stock goes nowhere the trader makes money. If the stock goes up a little, the trader makes money. The only way the trader can lose money if the stock goes up far enough to threaten the credit spread that has been sold. And even then, there are management and adjustment techniques that can be utilized to hedge against losses. Let's create an imaginary trading scenario to illustrate. Imagine that a trader believes that a particular stock will be heading down in the short term. Because he is bearish on this stock, he sells a bearish credit spread called a bear call spread which benefits from bearish move. The only way this spread trade can lose money is if the stock winds up doing 1 out of 4 possible scenarios - giving our trader a three out of four likelihood of winning. If the stock moves down as our trader predicts he wins. If the stock stays stagnant and goes nowhere, he wins. In fact, even if the stock moves against our trader and heads upward he wins just so long as the underlying doesn't move so far as to breach the spread sold. The only our trader loses is if the underlying moves far enough upwards passing the option strike price that was sold - which if it does, our trader could still salvage the position through appropriate management and adjustment methods - adding up to yet another reason why option sellers love this strategy so much along with the Iron Condor . DISCLAIMER: This article is provided as information only and is not to be taken as financial advice. While credit spread and Iron Condor trading can be a great way to generate passive income, of course like any investment method there are potential pitfalls one should be aware of before jumping in. To learn more about how to properly trade this option strategy, including how to correctly place, manage, and most importantly how to ADJUST them, visit our free video training website at Credit Spreads |