An options credit spread is an options trading strategy that involves buying and selling two options with different strike prices, but with the same expiration date. The options trader will sell one option, and buy the option with the same underlying, and expiration, only with a higher strike price.
The goal of this options trading strategy is to receive a net credit (or premium) when entering the trade. The trader hopes that the price of the underlying security will not move enough to cause the options to end up “in the money.
A bull put spread (aka “put credit spread”) is created by buying a put option with a strike price below the current market price of the underlying security, and selling a put option with a strike price below the purchased put option.
A bear call spread (aka “call credit spread”, “poor mans covered call”) is created by buying a call option with a strike price above the current market price of the underlying security, and selling a call option with same underlying and expiration, but with a higher strike price.
The maximum risk for either options strategy is the difference in strike prices minus the premium received when entering the trade. The maximum profit is equal to the premium received when entering the trade. For this reason, options traders should always consider the chances of profitability before entering a trade. Doing so will give the investor an edge, thereby allowing them a higher degree of success when trading options.
Wondering how to sell credit spreads profitably? Have you tried to sell options but got frustrated at how much money or margin you need in your account? If you want to sell put options, say on Tesla, you’ll need to be able to buy 100 shares of tesla before you can even start selling options …
How To Sell Credit Spreads: Bull Puts & Bear Calls Explained Read More »
Stay in Touch With Us
Get latest from The Financially Independent Millennial in our Friday Newsletter
