Butterfly Option Strategy » Credit Spread

Generate Consistent Stock Market Profit Through Credit Spread Writing

admin — Wed, 09 Dec 2009 15:25:25 +0000

Many traders and investors dream about making consistent profit on the stock market. Typically, investors would turn to fundamental analysis for medium to long term capital gains while traders would try to time the market using technical analysis to spot reversals or advantageous entry point and exit with the first sign of trouble. Unfortunately for everyone, the stock market is a zero-sum game. What this means is that for you to profit someone else would have to lose. The market exchanges acts like a distribution center of wealth. Essentially, without knowing, many novice investors and traders are actually trading against the professional and institutional traders. Who do you think will win most of the time? The answer is obvious. Credit Spread is one of the lesser known trading strategies available to the options trader. This strategy is call “credit spread” because you actually collect your target profits upfront or a credit when you enter into a credit spread position. Credit spreads are directional plays – bull or bear. The bull spread is called Bull Put Spread while the bear spread is known as the Bear Call Spread.

The Credit Spread Option Trading Strategy can be constructed to be a low risk investment vehicle. Using this strategy, we are able to use time decay in Options prices to our full benefit. Time decay works towards our advantage the closer it is to expiration. With this in mind, time can very well be our ally in our quest for profit. We just need to know how to use time to help us.

Fact – about 80% of all options expire worthless, it makes sense that serious and long term investor should only be writing credit spreads for a living.

How do we profit from Credit Spread?

Assuming that we are writing a Bull Put Spread:

If the stock moves upwards, we make money. If the stock moves sideways, we make money. If the stock moves lower, but is above the strike price that we sold our puts, we still make money.

I don’t know about you, but any trade that lets you earn a full profit when your stock moves higher, when it moves sideways, or even when it moves lower enhance your winning probability. Credit spread writing is a powerful trading strategy because, if written correctly, it provides room for error and you would still profit even though you are wrong.

The closer it gets to expiration (most of the time 3 rd Saturday of the month), the better it is for us. We make money using the passage of time. Many seasoned credit spread traders like to view the 3rd Saturday of the month as their pay day.

The biggest problem in Stock Options Trading is the race against time. More than 80% of options expire out-of-money or, in simpler terms, expire with no value. If you bought options, this means you would have lost all your money in the trade. So with this fact in mind, use an Options Trading Strategy that would put you on the other side of the table. And that is to use a time profiting trading strategy called Credit Spread.

Option Credit Spreads – Limited Risk With Limited Profit

admin — Mon, 07 Dec 2009 15:44:24 +0000

I started trading options in the late 90’s. After selling my first option and collecting an immediate credit I and became an option seller for life. I became a student of option selling strategies and started selling covered calls on stocks I brought and owned. I was doing OK collecting premiums month after month until a few of my stocks tanked and my losses over a 2 month period wiped out 6 months of profits. My mistake was picking not so good stocks for this covered call option selling strategy. So I became a student again and discovered an option trading strategy that is truly amazing.
Selling Option Credit Spreads on the broad based stock indexes was my new strategy. My goal was to collect premiums each month using OTM (Out of The Money) options spreads, specifically Bull Put Spread and Bear Call Spreads on the SPX index. I was choosing spreads that were very far OTM so that I had a greater cushion which reduced my risk.
Selling spreads is more akin to waiting for the big move to occur and it rarely does. Time decay is very relevant because despite being a spread, the spread does have a significant rate of decay in the last week or two. The beauty of this strategy is that you do not necessarily need to sit on top of it all the time. If your strikes are 40-60 points OTM and the SPX is up 1.20 today, you gain nothing by checking the quotes every minute. You can just check in the morning and at the close at your leisure as long as you are sufficiently OTM. When the market starts moving closer to your short strike, some due diligence is required. With credit spreads you want the position to expire worthless or buy back for way less that you sold it for.
The goal is to collect premium month to month. Using OTM spreads is a way to do this without predicting the market for the month. In any given month, the market can still move sideways, lower or higher and your positions will still be profitable. You are trading without concern over market direction for a major crash lower.
Today I employ a very safe and conservative Iron Condor credit spread trading strategy. My strategy with iron condor trading is to leg into the trade by selling the Bull Put Spread first for .20 – .25 cents. This is only a 2% – 2.5% return but the trade is very safe and the short strike is usually 60 points or more away from the current index price. I will then complete the condor by selling the Bull Call Spread later on for another .20-.25 cents, but only if the trade is safe. Safety is the key to my strategy with a goal of earning on average a 3% return each month.

Index Credit Spread Trading

admin — Tue, 01 Dec 2009 14:28:17 +0000

I am an active trader of option credit spreads on the SPX, NDX and RUT broad based stock indexes. I am very conservative and only enter into trades that have a very high probability of being profitable. I write OTM Bull Put Spreads first. During months when the market is moving sideways or slightly up, I add OTM Bear Call Spreads to create Iron Condors. My goal is to collect premium month to month. I want all my spread trades to expire worthless.

I like trading the Indexes because they are not subject to the same wild price swings as individual stock. It is also easier to make risk management adjustments on Index trades than say GOOG which can change in value quickly on some bad news.

An option credit spread is a limited risk option trade involving the simultaneous purchase and sale of two differing option contracts on the same Index, i.e. the SPX. This produces an immediate cash credit in your trading account. A profit is realized in a credit spread position if the index moves in the direction anticipated, remains the same and even if under appropriate circumstances the index moves adversely to your position.

Benefits of Index Credit Spread Trading

• Index credit spread trades have a 90% probability of expiring worthless when filled.

• These credit spread trades can profit in any type of market. Markets today are more likely to trend sideways, or move slightly higher or lower month to month.

• The majority of time you just make a trade, collect your credit and wait for the next month. This is not a day trading system. There is no need to monitor the market and your active trades all day long in front of the computer screen. In fact it’s really a very boring trading system.

• Paper trading is the best way to learn this option strategy. It’s all free with CBOE’s new Virtual Trading system.

• The SPX, NDX and RUT Indexes are not subject to the same wild swings as individual stocks.

• With Iron Condor trades you get double the credit but only have one margin side at risk.

• You want your credit spread trades to expire worthless but you can always buy them back for way less than you sold them for.

• Your trading capital is only used to support margin requirements. Most option brokers allow you to invest your trading capital and use it as collateral for spread trading. This way you can earn 2 returns with the same capital.

You can see my actual performance results of all trades for the last 12 months and the current YTD return which is amazing. My website is over 25 pages and full of content that covers all aspects of this trading strategy.

Consistent Monthly Cash Flow Using The Iron Condor Option Trading Strategy

admin — Tue, 01 Dec 2009 03:54:15 +0000

Iron Condor Spread is the combination of a Bullish Vertical Credit Spread and a Bearish Vertical Credit Spread on the same underlying asset. Depending on how the spreads are constructed, option traders will potentially be able to obtain twice the collect premium over a single spread position. Since there are bullish and bearish spreads involved in the Iron Condor Option Trading Strategy, there is an upper break even and a lower break even point. Profit is realized when the underlying asset remains above the lower break even point or below the upper break even point. In other words, as long as the price of the asset is above your bullish short strike and below the bearish short strike, the option trader will profit from both spreads through time decay. This strategy can be used regularly on a monthly basis to consistently generate a healthy cash flow in your trading business.
Time decay erodes the value of option prices. There are not many option traders who understand the benefit with trading spreads because it simply looks too complicated. Well, it is not.
Iron Condor Spreads is a market neutral strategy that has positive time decay and negative gamma with limited risk. Traders with any level of option trading experience can use this trading approach. Depending on your brokerage expertise and software, these spreads should be available electronically with single click functionality. Some brokers may even provide better leverage when you trade Iron Condor with them.
The IronCondorSpread Newsletter was designed to identify low risk option trading opportunity when an index remains in a narrow trading range during the current expiration cycle. Holding period is always not longer than 60 days.
In trading, the only objective is to make money. As a trader, you should not into big gains or excitement. Constructed correctly, the iron condor spread can be a consistent income generator. Before getting into new positions, you should look for positions that have an extremely high percentage of profitability. If you have the odds of winning in your favor. you will likely be profitable in the long run.
To do so, look specifically for options that have a relatively higher level of volatility. This means to look for positions that are over priced. Establish a trade positions that you believe that the underlying asset will not move to anywhere new your short strike.
To achieve consistent profit, our Iron Condor positions will always have a wide profit range on the underlying asset. So, in the event that the underlying moves up, down or even sideways, you will always profit with time decay. Having a large profit range is important because it will almost certainly guarantee that we will profit consistently and also it does not require us to spend a lot of time to monitor our open positions. We like the idea of trading with little stress and with little work. Our usual profit target for each Iron Condor spread is 13% to 18%. Profit is usually realized within 60 days.
Iron Condor trading is an effective trading strategy because it is a limited risk approach. You will never lose more that you have allocated for each trade. Although it comes with a high probability of winning, losses can be kept low when the trade moves against you. As rare as losing month may be for us, keeping losses low is the key to any successful trading strategy. While making money is important, capital preservation is equally or more important.
The IronCondorSpread Newsletter, http://www.ironcondorspread.com is the premier website in Credit Spread and Iron Condor Spread Option Trading strategy.

Option Credit Spread Trading – Limited Risk with Limited Profit

admin — Wed, 25 Nov 2009 01:38:02 +0000

Selling Option Credit Spreads on the broad based stock indexes was my new strategy. My goal was to collect premiums each month using OTM (Out of The Money) options spreads, specifically Bull Put Spread and Bear Call Spreads on the SPX index. I was choosing spreads that were very far OTM so that I had a greater cushion which reduced my risk.

Selling spreads is more akin to waiting for the big move to occur and it rarely does. Time decay is very relevant because despite being a spread, the spread does have a significant rate of decay in the last week or two. The beauty of this strategy is that you do not necessarily need to sit on top of it all the time. If your strikes are 40-60 points OTM and the SPX is up 1.20 today, you gain nothing by checking the quotes every minute. You can just check in the morning and at the close at your leisure as long as you are sufficiently OTM. When the market starts moving closer to your short strike, some due diligence is required. With credit spreads you want the position to expire worthless or buy back for way less that you sold it for.

The goal is to collect premium month to month. Using OTM spreads is a way to do this without predicting the market for the month. In any given month, the market can still move sideways, lower or higher and your positions will still be profitable. You are trading without concern over market direction for a major crash lower.

Today I employ a very safe and conservative Iron Condor credit spread trading strategy. My strategy with iron condor trading is to leg into the trade by selling the Bull Put Spread first for .20 – .25 cents. This is only a 2% – 2.5% return but the trade is very safe and the short strike is usually 60 points or more away from the current index price. I will then complete the condor by selling the Bull Call Spread later on for another .20-.25 cents, but only if the trade is safe. Safety is the key to my strategy with a goal of earning on average a 3% return each month.