Credit Spread Option Strategies - The Preferred Option Investment Strategy

Credit Spread Option Strategies

Credit Spread Option Strategies

A preferred non directional trading strategy is the option credit spread. This strategy one of the easier option spreads to comprehend for newer option traders. In addition it is simple to place, there is not much to do management wise while the trade is on - or in other words the credit spread trader doesn't need to be tied to their trading chair inspecting 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. Credit Spread Option Strategies

Traders like to sell these vertical spreads because when invested correctly the trades have a good probability of success and can allow the investor to still profit and 'win' without having to be exactly right with priced direction and movement. When sold correctly, credit spreads can bring the trader a good monthly return while the individual actually placing the trade could be incorrect with their belief and 'prediction' of where the stock market would be heading next.

For example: Let's say trader Jack is bearish on the stock XYZ. XYZ is trading at 100.00 and Jack believes that the stock will not move higher than 105.00 over the next 30 days. So, Jack sells a 105 / 110 call strike bear call spread - a call option credit spread that benefits in a neutral to bearish scenario.

Trader Jack can win in 3 of 4 possible stock market scenarios by using this spread option. If XYZ drops like Jack thinks it will, the spread trade wins. If XYZ doesn't move up or down - just stays pretty much in the same area as it currently (the 100.00 level), the spread wins. Even if the stock moves upwards - defying what Jack believes will happen - this spread trade could still be profitable - as long as it doesn't move above the 105.00 level. So, in each of these scenarios, the credit spread can be profitable. The only way it will not be profitable is if XYZ moves up past the 105 level - in which case the trader would then need to either remove the trade for a possible loss - or adjust the trade to try and recapture the profit. Credit Spread Option Strategies

Credit Spread Option Strategies - The Preferred Option Investment Strategy

By: Trading Expert

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