Credit Spreads by BetterTrades

In most of the stock market strategies taught by BetterTrades, the investor wants to see the underlying stock move in a certain direction, either up or down, in order to make a profit. Students who graduate from the Market Essentials workshop in Las Vegas leave with the understanding that non-direction trades, those using credit spreads, are a very viable option under any sort of stock market conditions.

A credit spread is a limited risk options strategy that is implemented by selling one naked option, which incurs an obligation to perform, and buying a second option at a different strike price in order to offset the obligation. The advantages of a credit spread begin with receiving the premium; the trader receives a payment up front when they sell the first option and the payment occurs when the trade is opened. The losses in this directional trade are capped and the trader will never lose more than the spread amount, less the credit received for opening the position. While the losses are capped, so are the profits, although this disadvantage is perceived by BetterTrades as acceptable since the advantages outweigh the disadvantages.

There are two main types of credit spreads: the bull put spread, used when the stock is expected to go up in value, and the bear call spread, used when the stock is expected to go down in value. (Putting both spreads together on the same stock is another non-directional trade known as an Iron Condor.)

A bull put credit spread is done on positions a trader feels bullish about and can be used instead of selling naked puts. Since a trader is in a bullish position, they look for stocks that are at support and headed up. The BetterTrades recipe calls for the trader to sell the put option at the first strike price below support and buy the put option at the next strike price below that. The stock price must close at or above the strike price you sold at expiration for maximum profits.

The bear call spread is done on positions a trader feels bearish about and can be profitable if the stock goes down, stays the same, or goes up slightly. Since the bear call spread is used for stocks that are headed down, a trader will sell the call option at the first strike price above resistance and buy the call option at the next strike price above that. The stock priced at expiration must close at or below the strike price you sold for maximum profits.

Credit spreads can be a very profitable strategy for traders to have in their arsenal. They reduce the risk of losses and improve the odds that you may make some money, which is the goal of any trader. Although their potential capped profits are a negative, the potential for a BetterTrades student to make a solid return on an investment should be enough to interest anyone.