Join the NASDAQ Community today and get free, instant access to portfolios, stock ratings, real-time alerts, and more! A driver in a very useful club, but should not be used in every situation on the golf course. It is awfully hard to putt with your driver. It is equally as hard to chip out of the sand with a putter. Let us look at a pretty common personality for options—a bullish credit spread—and how that personality should be played in the market: A bullish credit spread should not be used in every scenario in the market.
It is important for you, as a trader, to know the different trading tools available for any market scenario. Meet a bullish credit spread here, and understand its personality. One of the key trading tools I employ regularly is the bullish put vertical, or Bull Put.
This trade is applied in a stagnant or stagnant-to-bullish trend. The bullish trend can be slight, moderate, or accelerated. You will be selling a Put and buying a Put simultaneously.
The Put that you short sell will be at a higher strike price than the Put that you long buy , and therefore you will generate a credit to your account. This credit is your maximum profit. The strategy with this trade is to capture the effects of time decay on the option sold, as well as take advantage of a bullish move in the stock. The put option that you long buy is your hedge, in case the stock moves quickly in the other direction.
As with all trades it is important to have both a primaryandsecondaryexitstrategy. If you miss the green on the golf course, what will you do to save par? The primary exit strategy for the Bull Put trade is to let both the long put and the short put options that you hold expire worthless.
The added benefit to this exit strategy is that you will eliminate the commissions on the back end of the trade by simply allowing the options to expire worthless. The secondary exit strategy can involve either closing out the position for a small pre-determined loss or convert the trade into a collar trade.
Use Out of the Money OTM options. Credit spreads can be written At The Money, but have a higher risk of assignment. By structuring this trade in a way where you are writing an option far from the current stock price, it increases your probability of success with the trade.
Look for options high in implied volatility. Overpriced options are generally a good thing to sell. Oftentimes there is a reason why implied volatility is high, so make sure there is not significant fundamental risk in the stock before placing. Use strike prices that are side by side. Try to stay to 5-point spreads when using short-term credit spread trades. You can go smaller if they are available. The closer together your spread, the lower your risk.
Trade with the market trend. Do your due diligence.
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Do not place this trade during an option series where a scheduled news event like earnings could cause the equity to change its direction rapidly. Set a minimum and a maximum credit needed based on the time until expiration and your tolerance for risk. Put money in your pocket.
It may not be a significant amount of money but, when structured correctly, these trades have a very high ratio of success. Winning more consistently is the single most important thing a trader can do. Understanding the personality of the trade will allow you to make the right decisions on how to play it, and increase your profitability.
Trading, like golf, is a game of practice, discipline, and skill. For more information on how to structure other trades like the Bull Put and how to adjust losing trades into winning trades, visit www. The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc. Enter up to 25 symbols separated by commas or spaces in the text box below.
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Join Today Already a member? Option Credit Spread Strategy: An Opportunity For Success February 03, , By Greg Jensen Founder and CEO, OptionsANIMAL Every trade has a personality. Every trade represents an opportunity for success and an opportunity for failure. The choices you make about what, when, and how much define your success.
You make those choices based on the personality of the particular trade. Options are perhaps the most personality driven of all trading instruments. This article appears in: Investing , Options , Investing Ideas. Download Your Free Copy of OptionANIMAL's Market Forecast Free Options Webinar: Most Popular Highest Rated. AMZN Is Up Sharply After Whole Foods Acquisition Snap's share price sinks, trades just above IPO price Airline: EMT Focused On Dying Woman, Not Her Underwear.
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