I have been bombarded with questions from investors for years about how to trade small cap stocks for income using options.
In my opinion, the best way to bring in income from options on a simple and reliable strategy for options basis is by selling vertical call spreads and vertical put spreads otherwise known as credit spreads.
Credit spreads allow you to take advantage of theta time decay without having to choose a direction on the underlying stock.
By Lucas Downey Updated May 29, Traders often jump into trading options with little understanding of the options strategies that are available to them.
Vertical spreads are simple to apply and analyze. But the greatest asset of a vertical spread is that it allows you to choose your probability of success for each and every trade.
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And, in every instance vertical spreads have a limited risk, but also limited rewards. My favorite aspect of selling vertical spreads is that I can be completely wrong on my assumption and still make a profit. Most people are unaware of this advantage that vertical spreads offer. Stock traders can only take a long or short view on an underlying ETF, but options traders have much more flexibility in the way they invest and take on risk.
So what is a vertical credit spread anyway?
A vertical credit spread is the combination of selling an option and buying an option at different strikes which lasts roughly 10 — 40 days. There are two types of vertical credit spreads, bull put credit spreads and bear call credit spreads.
Option buyers are charged an amount called a "premium" by the sellers for such a right. In contrast, option sellers option writers assume greater risk than the option buyers, which is why they demand this premium. Options are divided into "call" and "put" options. There are some advantages to trading options.
Here is an example of how I use credit spreads to bring in income on a monthly and sometimes weekly basis. I will use a bear call credit spread for this discussion.
Fear is in the market. However, opportunities are plentiful with the VIX trading at 35 — especially those of us who use credit spreads for income.
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Remember, a credit spread is a type of options trade that creates income by selling options. And in a bearish atmosphere, fear makes the volatility index rise.
And, with increased volatility brings higher options premium. And higher options premium, means that options traders who sell options can bring in more income on a monthly basis.
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So, I sell credit spreads. So how can a bull put allow me to take advantage of this type of market, and specifically an ETF, that has declined this sharply? Well, knowing offshore zones binary options the volatility had increased dramatically causing options premiums to go up, I should be able to create a trade that allows me to have a profit range of percent while creating a larger buffer than normal to be wrong.
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Sure, I could swing for the fences and go for an even bigger pay-day, but I prefer to use volatility to increase my margin of safety instead of my income. Think about that. Most investors would go for the bigger piece of the pie, instead of going for the sure thing. But as they say, a bird in the hand is worth two in the bush.
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Back to the trade. Basically, IWM could have moved 9. This margin is the true power of options.
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So, selling and buying these two calls essentially gave me a high probability of success — because I am betting that IWM would not rise over 10 percent over the next 32 days. However, I did not have to wait.
IWM collapsed further and helped the trade to reap 10 percent of the 12 percent max return on the trade. With only 2 percent left of value in the trade it was time to lock in the 10 percent profit and move on to another trade.
I am always looking to lock in a profit and simple and reliable strategy for options take unneeded risk off the table especially if better opportunities are available.
Not too shabby. The ETF was range-bound, so committing to a big directional play higher or lower was a high risk decision.
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I preferred to make a low-risk, non-directional investment, using credit spreads. As I have said before, we can also use range-bound markets to make a profit. How can credit spreads allow simple and reliable strategy for options to take advantage of a market, and specifically this ETF, that has basically stayed flat for seven months?
- Неожиданно поле красных огней исчезло - в течение доли секунды.
- Кажется, да, - ответила Николь.
- Она явно понимает смысл полос.
Well, knowing that the market has traded in a range for the last seven months we can use this as our guideline for our position. Inherently, credit spreads mean time decay is your friend.
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