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Learn How To Trade Credit Spreads

By Edited Nov 13, 2013 0 0

Credit spreads are a great strategy and one that has worked really well for me. However, beginners need to be wary and fully understand some of the risks involved and also how you can manage those risks. With this option strategy you are looking to make small monthly gains while avoiding any large losses. In order to avoid these big losses you could:

1. Try selling the spreads as far away from the stock price as possible - By doing this, the stock will have to move by a significant amount in a limited period of time for you to suffer any big losses. Conservative credit spreads can be placed that will profit if the market falls by less than say 6-8%.

2. Use Good Market Analysis - When placing these trades, you need to have a view on where the market is going, where the underlying trend is and perhaps most important is to know where the relevant support and resistance lines are. While you can trade this strategy conservatively which will allow you some margin for error, you still need to have good analytical skills and be a good judge of the stock market, so learn to be a good trader and market analyst before trying this strategy.

3. Don't Trade Stocks, Trade Indexes or Index ETF's - While you can trade individual stocks with this strategy and be successful, you will probably have more success trading indexes. The thing all credit spread sellers fear is swift, sharp movements in stock prices. This is much more likely to happen in individual stocks rather than indexes.

4. Stop Losses - Stop losses are really important in order to avoid large losses on credit spreads. You should place a stop loss order at the same time that you enter the trade, that way you will be covered and won't forget to place a stop loss. When you have a stop loss in place, you can spend less time scrutinising the trade as you know you have some level of protection there. One rule of thumb is to set the stop loss at 2 times the net credit received.

5. Learn How To Trade Credit Spreads - It may seem obvious, but learn all you can about credit spreads first. You should paper trade first until you get the hang of them. Trade them in all different types of market cycles and using differing stike prices and expiry dates and see how the spreads behave when the market moves.

In summary, credit spreads are a great strategy and can help you make a consistent monthly income trading options. However, there are significant riks involved so remember to use the advice contained above before risking real money.

Video Tutorial On Credit Spreads



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