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How To Make A Full-Time Income Trading Less Than Part Time

Big Dogs Exposed

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Newsletter: Vertical Credit Spreads

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Vertical Credit Spreads

Where your bias towards a stock is bullish, in that you expect its price to increase ahead of the strike price of the short put position, you would construct a bull put spread. This is accomplished by purchasing a lower strike put, and selling a higher strike put, both with the same expiry date. The risk of such a position is limited to the difference between the two strike prices, minus the net credit.

On the other hand, were you bearish in your outlook, you would resort to the bull call spread. It is assembled by purchasing a higher strike call, and selling a lower strike call, both with the same expiry. Again, the risk is limited to the difference between the two strike prices, minus the net credit. What you are trying to do with both types of spreads is keep the credit you earn, regardless of your bias.

And now for the five rules: 1.) Only use options expiring in 45 days or less. Less time means the less chance that the stock will end up in a situation where the short position is assigned, thus creating maximum loss. 2.) Make sure the options are liquid, to minimize potential slippage costs. Such determination can be made by assessing the option’s volume and open interest statistics. 3.) Inspect implied volatility levels for signs of the options being either inexpensive or overpriced. Try to find an opportunity where the option you wish to sell has a higher implied volatility than the option you are considering buying. You would also want to establish a trade that achieves the highest net credit possible – keeping in mind the fact that your maximum profit is capped at the net credit you receive. 4.) Assess the risk with the trade you are about to put on. 5.) Have an exit strategy in place before you press enter.

On that note, keep in mind that, if the short position goes out-of-the-money, then you would want to hold onto your trade until both options expire, thereby gaining the full return. Conversely, if the short position ends up in-the-money or at-the-money, you would want to buy it back upon expiration, and sell the long position, if it still has value.

You can certainly use credit spreads on a longer term basis. But, in all likelihood, you would favor debit spreads for the long haul, given that credit spreads require margin.

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How To Make A Full-Time Income Trading Less Than Part Time

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