Thursday, November 22, 2012

Weekly Options - Credit Spread Income Every Week

By Ted Nino


Once commonly used strategy by option traders is the Credit Spread. In addition to it being an easy-to-understand strategy for option trading, a lot of newbies in option trading also find this approach very simple to do requiring them lesser time to manage and work on it. Thus, it will then be unneccessary for credit spread traders to sit all day in from of their computers just to check out the changes in the market and monitor if they are constantly generating their income with this trade.

Also, take note of the vertical spread. It is one of the important aspects of a number of option spread strategies such as the iron condor, the butterfly spread, and the double diagonal. The usual thing for most beginners in weekly options trading is to head through this approach right after they have discovered the options and have decided to buy straight calls and puts, then covered calls, and then debit spreads.

Even if weekly options investors do not perfectly match the appropriate price direction and movement for an investment, they can still be successful in gaining continuous profit when they buy these vertical spreads. They just have to make sure that the investment is properly managed. A trader could be incorrect in predicting the direction of the stock market. If the stock market goes to the opposite direction from what has been anticipated by the trader, this does not affect their monthly return when credit spreads are sold appropriately.

One example would be when a trader is bearish to the XYZ stock. XYZ is trading at a recent high and our trader believes that the stock will not move any higher over the next 30 days. And so a bear call spread is sold by the trader. This spread is actually a vertical spread that is very helpful for neutral to bearish situation.

This spread trade wins if our Weekly Options trader's prediction is correct. That is, when the stock moves down. Even if the stock moves up against our traders outlook, this trade can win just as long as it doesn't move up too much. The only way this position will lose money is if the stock moves too high too quick - in which case the trade could still be profitable just as long as our trader knows how to properly manage and adjust the position.




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