Thursday, October 5th, 2017

Credit Spreads- Limited risk strategy

A credit spread is a limited risk strategy. Your risk is predefined and your reward limited. A spreader is a risk aversed trader who is using probabilities to profit from the markets. A credit spread is a net credit to your account that involves buying one option and selling another option at a different strike. Option sellers always have the edge on option buyers, time is on their side.

An option is a wasting asset, melting ice cube in your palm and by selling an option you have achieved greater possibility of success than a buyer of an option. Profits are unlimited for an option buyer though. He can benefit far greater rewards than an option seller, but time is not on his side, and he outcomes are limited and short.

Sell August  RUT 750 puts  Buy August  RUT 740 puts  Net credit = 2.5

Your risk is 10-2.5 = 7.5 ( difference between strikes-difference in prices) and your maximum reward is 2.5.

Such an options positions can be created in a such a manner, that the probability of success is very high such maximum reward is attained in a given time period. It all comes down to probabilities of outcomes and statistical outcomes, that are mathematically calculated on an any options trading soft ware.

Credit spreads are of 2 types 1. Bullish credit spread 2. Bearish credit spreads.

A combination of the two creates an IRON CONDOR which is basically a directionless options trading strategy. Index options trading


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