Credit Spreads Is An Advanced Option Trading Strategy - By: Karl Obrien

1. Sell the spreads as a long way away from the current amount as possible - In this way the stock will have to move by just about all in a short period of time for them to suffer large losses. You can set up fairly conservative credit spreads that will profit if the market falls by less than say 8-10%.

One point this is that this is only looking at the trade on expiry. If the stock moves really quickly against you, even if it's just 4-5%, you will suffer unrealized losses, and this is where you need figure out how to manage and adjust that trade if necessary. If you believe the market will excersice against your position, then you definately should exit the trade before the loss gets any more substantial. Stop losses are also a critical aspect of managing this strategy.

2. Stop Losses - It is best to set a maximum amount of loss before you exit the positioning. I like to work with a 200% rule which is fairly common for options sellers. For example, if this premium I received any time opening the trade was $0. 23, I would close the trade in the event the spread rose to $0. 69. In this way, I will be straight from the trade long before I hit my maximum loss point.

One of the primary risks with this strategy can be a sudden and very pointed move against you (usually this occurs in the downside, so is much more relevant for sellers involving bull put spreads). If you are concerned about this taking effect, you could always enter a stop loss order just on your sold option. By doing this, if the market moves quickly, you will get out of your sold option, limiting your losses together with hold only the long option which may end up making a profit if the market continues in that direction. These gains will help, and could potentially even outstrip the losses made to the sold option. If you're worried about a "flash crash" category event, this is 1 protect yourself.

3. Market Analysis - Speaking of the flash crash, you really need to be an experienced investor in shares before using credit spreads for an options strategy. You need so as to analyze the market together with determine the trend which way the market is most probably to go. Generally the stocks favor the way of least resistance. Prior to the flash crash, the market have been fairly bearish, so an experienced investor would have ended up selling call spreads rather then put spreads. Bear call spreads can have been profitable during the flash crash regardless of the odd rise in volatility.

several. Trade indexes not person stocks - Indexes generally have much lower volatility than individual stocks and that is why, I rarely use this strategy on individual stocks. Using FFIV as a recent example, on just one day, there was a bad news report and the stock dropped about 20%.

About the Author

Mike Conley is the Senior Editor of The Iron Condor Newsletter. The ICS Newsletter focus only on providing Credit Spread Strategy and Iron Condor Option Trading Strategy. The ICS trade recommendations have consistently generated $3000 to $5000 of trading profit EVERY month in bullish, bearish and sideways market.

Article Directory Source: http://www.articlerich.com/profile/Karl-Obrien/227275

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