Option Credit Spread Trading - Limited Risk with Limited Profit
By Brad Griffin
I started trading options in the late 90's. After selling my first option and collecting an immediate credit I and became an option seller for life. I became a student of option selling strategies and started selling covered calls on stocks I brought and owned. I was doing OK collecting premiums month after month until a few of my stocks tanked and my losses over a 2 month period wiped out 6 months of profits. My mistake was picking not so good stocks for this covered call option selling strategy. So I became a student again and discovered an option trading strategy that is truly amazing.
Selling Option Credit Spreads on the broad based stock indexes was my new strategy. My goal was to collect premiums each month using OTM (Out of The Money) options spreads, specifically Bull Put Spread and Bear Call Spreads on the SPX index. I was choosing spreads that were very far OTM so that I had a greater cushion which reduced my risk.
Selling spreads is more akin to waiting for the big move to occur and it rarely does. Time decay is very relevant because despite being a spread, the spread does have a significant rate of decay in the last week or two. The beauty of this strategy is that you do not necessarily need to sit on top of it all the time. If your strikes are 40-60 points OTM and the SPX is up 1.20 today, you gain nothing by checking the quotes every minute. You can just check in the morning and at the close at your leisure as long as you are sufficiently OTM. When the market starts moving closer to your short strike, some due diligence is required. With credit spreads you want the position to expire worthless or buy back for way less that you sold it for.
The goal is to collect premium month to month. Using OTM spreads is a way to do this without predicting the market for the month. In any given month, the market can still move sideways, lower or higher and your positions will still be profitable. You are trading without concern over market direction for a major crash lower.
Today I employ a very safe and conservative Iron Condor credit spread trading strategy. My strategy with iron condor trading is to leg into the trade by selling the Bull Put Spread first for .20 - .25 cents. This is only a 2% - 2.5% return but the trade is very safe and the short strike is usually 60 points or more away from the current index price. I will then complete the condor by selling the Bull Call Spread later on for another .20-.25 cents, but only if the trade is safe. Safety is the key to my strategy with a goal of earning on average a 3% return each month.
About the Author
Brad Griffin is an Accountant and CPA and has been Investing in the U.S Stock Market for 10 years and the options market for the past 5 years. I am now sharing my knowledge and success trading options at my website http://www.indexspreadoptionstrading.com.
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