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How Do Credit Spreads Work?
A credit spread is an income trade where the primary options instrument is being sold. You can sell a put spread or a call spread or do both at the same time.
For example, you could sell a vertical put spread by selling a 50 strike put option for maybe $0.90 and buying a 45 strike put option for maybe $0.40 per share, leaving you with $0.50 per share of credit. As long as your equity remains above the $50 per share price point by the expiration date of the options, you will keep your $0.50 per share of credit. So, if you had 10 contracts on each put option, you'd win $500. (1 contract = 100 shares of stock, so 10 x 100 x $0.50 = $500.)
The risk in the trade is calculated as follows:
Strike price of the short put (50) minus strike price of the long put (45) minus your credit ($0.50) = $5.00 - $0.50 = $4.50 per share. Or, $4,500 risk to make $500.
Why Are Credit Spreads So Popular?
Credit spreads are popular because they typically are set up as very high probability of working. Oftentimes, investors will set them up with 7o to 80% chance of success based on past volatility and movement of the equity.
They can also work in multiple trends, slighly bullish, stagnant, slightly bearish, etc.
At OptionsANIMAL, we don't just teach credit spreads, but we also teach how to adjust them when they go against you. We actually have a 90% success rate on our trades dating back to 2009 using proven backup plans.
Learn more in a free class or call us directly at 1-888-297-9165 and schedule a free consultation.
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