Credit Spread - The Foundation Of Monthly Option Income
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 trade is a basic building block of many if not most other more complex option trading strategies such as the iron condor spread, the butterfly, and the double diagonal trade. For example, the butterfly is created using one credit spread and one debit spread, while the iron condor is made up from two credit spreads, one on either side of where the underlying is currently trading at.
These trades are popular due to their high probability of winning. When placed and traded properly, it is possible for credit spreads to provide the trader with consistent income month after month - without the trader having to be right about market direction. Basically, those who trade this strategy just need to be correct about one thing which is where the stock or index being traded will not go.
To demonstrate let's invent a trade where the option trader feels as if the stock being traded is about to tank. Because he believes that this specific stock will not advance any higher from it's current position a bear call vertical spread is sold, bringing in a nice credit.
This trade can win in 3 of 4 possible stock movement scenarios by using this option spread. If the stock drops like our trader thinks it will, the spread trade wins. If the stock doesn't move up or down - just stays pretty much in the same area as it currently, the spread wins. Even if the stock moves upwards - defying what our trader believes will happen - this spread trade could still be profitable - as long as it doesn't move above a certain level. So, in each of these scenarios, this trade would be profitable. The only way they would not be profitable is if the stock moves up past the level that has been sold - in which case the trader would then need to either remove the trade for a possible loss - or adjust the trade in an attempt to make it profitable once more.
Article Source: FxTradingStock.com
About the Author
While credit spread 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
by: Ten Nino
Total views: 70
Word Count: 423
Date: Wed, 23 Jun 2010
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