Option Spread Trading

Option Spread Trading is a great option strategy for the current choppy market. Option Spread Trading is also known as a credit spread and is a great option selling technique in an unpredictable market. When the market is more predictable and bullish, buying calls is the usual options strategy, but in our current choppy market a safer strategy is to sell puts. To avoid damage in this market, purchase cheaper options, or option spread trading.

Option Spread Trading - Example

To make money in option spread trading, an options trader must have a winning percentage against the index. For example, if an options trader is bullish on the S&P at 550 with a July expiration, he could sell the July 540 put at 9 using options spread trading. The options trader would then buy the June 535 put at 8. In this option spread trading, the options trader would net $1000.

Option Spread Trading - Risks

Of course, in option spread trading it’s a $4000 risk to make $1000, but the options trader can generate a winning percentage by using this strategy of option spread trading. Market scenarios can drop, stay flat, or rise and the trader still wins by using option spread trading. Some option spread trading results in winning streaks of 90% over several years.

Option Spread Trading - Managing Risk

The important thing about risk in option spread trading is that it’s necessary to make money, but traders must manage their risk. Option spread trading works well when the market is moving against the position. Additionally, option spread trading should not be used to pyramid a trader’s profits. Traders should remain with a fixed number of contracts (per trade) in option spread trading to avoid losing profits on a loss.

Option Spread Trading - Index options

For option spread trading it’s best to use the index options on S&P 100 Index, the S&P 500, or the Nasdaq 100 Trust. Individual stocks can be used for option spread trading, but it increases the risk of a news item about the stock causing a gap. The indexes offer increased stability for option spread trading while providing risk management. When a trader places option spread trading orders, he wants to place them simultaneously while indicating a net credit.

Option Spread Trading - Goals

It’s best for a trader to establish option spread trading once per month on an index. The trader wants to see options in the spread expire worthless, which allows the option spread trade to collect credit. Remember, time passage is beneficial in option spread trading and the goal is to increase the winning percentage and net profits. This goal can be reached with option spread trading.