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Fact - about 80% of all options expire worthless, it makes sense that serious and long term investor should only be writing credit spreads for a living.

How do we profit from Credit Spread?

Assuming that we are writing a Bull Put Spread:

If the stock moves upwards, we make money.
If the stock moves sideways, we make money.
If the stock moves lower, but is above the strike price that we sold our puts, we still make money.

I don't know about you, but any trade that lets you earn a full profit when your stock moves higher, when it moves sideways, or even when it moves lower enhance your winning probability.

Many traders and investors dream around making consistent profit on the stock market. Typically, investors would turn to fundamental conference for medium to long term virtuous gains while traders would try to time the market using technical debate to spot reversals or acceptable entry point and exit with the first sign of trouble. Unfortunately for everyone, the stock market is a zero-sum game. What this means is that for you to profit someone else would have to lose. The market exchanges acts like a distribution center of wealth. Essentially, without knowing, many novice investors and traders are positively trading in spite of the professional and institutional traders. Who do you think will win most of the time? The offertory sentence is obvious. Credit Spread is one of the lesser known trading strategies lumpen to the options trader. This strategy is call “credit spread” considering you nothing else but align your target profits upfront or a credit when you enter into a credit spread position. Credit spreads are directional plays – bull or bear. The bull spread is named Bull Put Spread while the bear spread is known as the Bear Call Spread.

The Credit Spread Option Trading Strategy can be constructed to be a low risk investment vehicle. Using this strategy, we are able to use time decay in Options prices to our full benefit. Time decay works towards our break no bones the closer it is to expiration. With this in mind, time can very well be our ally in our quest for profit. We just need to know how to use time to help us.

Fact - re 80% of all options expire worthless, it makes sense that serious and long term investor should only be writing credit spreads for a living.

How do we profit from Credit Spread?

Assuming that we are writing a Bull Put Spread:

If the stock moves upwards, we make money.
If the stock moves sideways, we make money.
If the stock moves lower, but is farther the strike price that we sold our puts, we still make money.

I don't know through you, but any trade that lets you earn a full profit when your stock moves higher, when it moves sideways, or even when it moves lower enhance your winning probability. Credit spread writing is a powerful trading strategy because, if written correctly, it provides room for error and you would still profit even though you are wrong.

The closer it gets to expiration (most of the time 3 rd Saturday of the month), the overcome it is for us. We make money using the passage of time. Many seasoned credit spread traders like to view the 3rd Saturday of the month as their pay day.

The problem in Stock Options Trading is the race on route to time. More than 80% of options expire out-of-money or, in simpler terms, expire with no value. If you store options, this means you would have lost all your money in the trade. So with this fact in mind, use an Options Trading Strategy that would put you on the other side of the table. And that is to use a time profiting trading strategy titled Credit Spread.

Copyright 2005 William Tan

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