What are Credit spreads?

Trading Credit spreads allow you to get profit first. It is one of the most widely traded spread strategies out there.

Anytime you enter a trade that involves buying and selling different options and you make money up front it credits your account with that money. There are two different types of credit spreads.

You can enter a bull put spread where you buy an out of the money put and sell a higher put. In this case you make money first and as long as the stock stays above the strike price you sold you keep your profit.

For example you

Buy the $55 put for $2 and

Sell the $60 put for $3

Your total profit is $1 and as long as the stock stays above $60 by expiration you keep the profit. Your risk is also limited to the difference between the spreads minus the profit you made. In this case $4.

The other way is to enter a bear call spread which you buy a call and sell a lower call. You make money as long as the stock stays below the call you sold.

For example you

Buy the $85 call for $1 and

Sell the $80 call for $1.75

In this case your profit is $.75 and you make that as long as the stock stays below $80.

Advantages and Disadvantages to This Strategy

Just like everything else there are advantages and disadvantages to it. The big advantage to this strategy is the probability. You are simply more likely to make money with an out of the money credit spread strategy then you would be if you are trading the stock itself or options on the stock.

This is because it gives the stock more room to move. You are able to make money from the stock as long as it doesn’t go past your strike price. That is a big deal.

The disadvantage of this strategy is that you usually end up risking more money than you can potentially make. So, you need to be right more often just to be profitable.

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