Butterfly Options » Index Option Trades

Option Credit Spreads – Limited Risk With Limited Profit

admin — Sun, 06 Dec 2009 11:43:27 +0000

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.

Option Credit Spread Trading – Limited Risk with Limited Profit

admin — Thu, 26 Nov 2009 08:43:06 +0000

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.

Index Credit Spread Trading

admin — Wed, 25 Nov 2009 12:47:12 +0000

I am an active trader of option credit spreads on the SPX, NDX and RUT broad based stock indexes. I am very conservative and only enter into trades that have a very high probability of being profitable. I write OTM Bull Put Spreads first. During months when the market is moving sideways or slightly up, I add OTM Bear Call Spreads to create Iron Condors. My goal is to collect premium month to month. I want all my spread trades to expire worthless.

I like trading the Indexes because they are not subject to the same wild price swings as individual stock. It is also easier to make risk management adjustments on Index trades than say GOOG which can change in value quickly on some bad news.

An option credit spread is a limited risk option trade involving the simultaneous purchase and sale of two differing option contracts on the same Index, i.e. the SPX. This produces an immediate cash credit in your trading account. A profit is realized in a credit spread position if the index moves in the direction anticipated, remains the same and even if under appropriate circumstances the index moves adversely to your position.

Benefits of Index Credit Spread Trading

• Index credit spread trades have a 90% probability of expiring worthless when filled.

• These credit spread trades can profit in any type of market. Markets today are more likely to trend sideways, or move slightly higher or lower month to month.

• The majority of time you just make a trade, collect your credit and wait for the next month. This is not a day trading system. There is no need to monitor the market and your active trades all day long in front of the computer screen. In fact it’s really a very boring trading system.

• Paper trading is the best way to learn this option strategy. It’s all free with CBOE’s new Virtual Trading system.

• The SPX, NDX and RUT Indexes are not subject to the same wild swings as individual stocks.

• With Iron Condor trades you get double the credit but only have one margin side at risk.

• You want your credit spread trades to expire worthless but you can always buy them back for way less than you sold them for.

• Your trading capital is only used to support margin requirements. Most option brokers allow you to invest your trading capital and use it as collateral for spread trading. This way you can earn 2 returns with the same capital.

You can see my actual performance results of all trades for the last 12 months and the current YTD return which is amazing. My website is over 25 pages and full of content that covers all aspects of this trading strategy.