“…How You Can Safely Use Credit Spreads to Function Like Your Own Insurance Business and Collect Fat Premiums from this Market…”
Would you like to learn one of the best-kept secrets of the Wall Street Elite? The type of secret that analysts, brokers and traders don’t want you to know? Of course, you do, everybody wants in on this type of secret.
Well, I’m going to give it to you straight. This closely guarded and often misunderstood secret is Selling Credit Spreads. That’s it. You see on the surface it seems quite simple to understand but there is more to it. Keep reading and I’ll let you in on some of these closely guarded techniques that you’ll need to consistently collect fat premiums from this Market.
Selling a credit spread involves selling an option while at the same time purchasing another option at higher strike price or lower strike price option, while you collect the difference and bank it into your trading account.
For example, selling a PUT Credit Spread involves selling a PUT contract and buying a lower strike PUT contract with the same expiration. The maximum profit would occur if the underlying option contract is trading at or above the sold put strike price…then at expiration the spread would expire worthless allowing you to keep the premium collected.
Selling a CALL Spread involves selling a CALL and buying a higher strike price CALL with the same expiration date. In this case, the maximum profit would be realized if the stock is trading at or below the sold call strike price at expiration leaving the spread to expire worthless and once again you are keeping the premium collected. Money in the bank.
The long options are there to protect the position from the potential losses associated with selling options. With a spread, the most that the position can lose is the difference between the strikes minus the initial credit received. This would occur if the stock is trading above at or above the long call or at or below the long put.
Using a call credit spread as an example, if a trader sold a $20 CALL and bought a $15 CALL, creating a credit of $1, the most the trader can lose is $4 (5 – 1) if the underlying closed at or above $20.
The purpose of a credit spread is to profit from the time decay of the expiring option while protecting gains with further out-of-the-money long options. The goal is to buy back the spread for less than what it was sold for or not at all.
Just like selling short stock, a trader wants to sell something that is expensive and buy it back for less money. The same holds true for credit spreads. Sell high, Buy Low.
How does a Credit Spread function like an Insurance Business you ask?
The Credit Spread strategy is similar to the insurance business because insurance companies get to keep premiums if people don’t get sick or if people don’t have accidents. By putting on a Credit Spread, Traders basically turn themselves into something like an Insurance Business they keep the premiums as long as something doesn’t go drastically wrong.
Just like an insurance company must decide if the risk is worth the potential reward, option traders that trade credit spreads have to analyze how much premium can they collect versus how much can they lose and the probability of having a profitable trade.
This is an exciting time to be researching Credit Spreads. I invite you to learn more about Credit Spreads by Clicking Here.
To your financial future!
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