Trading strategy
A credit spread is a trading strategy of options when you buy an option, call or draw, the exercise price and simultaneously selling the same type on a different price options exercise, which are both valid with my same premium received from selling the option must be greater than the purchased option, so a loan when the transaction. Disintegrate over time, the option premium to the experience of time, and while the stock price is not the exercise price to sell expired passport, take full credit. There are two ways the credit spreads – or trade with a low risk high probability trade or commerce.
Trade with low risk to compose an agreement on money (ITM) options or the money (ATM) options for credit spreads. Suppose that the example of a stock currently trading at $ 55. They have a vision bearish for the stock and thinks it could fall below $ 50 at the expiration of option. If you have a line of credit with options, called Bear Call Spread. They (sell) a $ 50 ITM call for $ 5.75 to buy a 55 $ Tickets $ 2.00 call for a total loan of $ 3.75. The maximum loss for the spread, the difference between strikes, 5 $ (55-50), which risks you max $ 1.25 (5 – 3.75) makes. Therefore it is only a low risk strategy. You receive $ 3.75 for a maximum loss of only $ 1.25, representing a 300% return on risk. So we have a high return for little risk.
So what could go wrong with this business? The chances of success. The stock trades below $ 50 and stay a successful trade option expiration. You should look in your assessment of the direction of trade.
A strategy is likely to trade from a compilation of the money (OTM) options. Using the above example of a file at $ 55 and you think its upward movement so tired and have a bearish view, the feeling that he will fall and stay below $ 50. We create a credit spread with different strike prices. You can call an OTM $ 65 and $ 1.10 for the OTM call selling for $ 70 $ 0.50 resulting in a total credit of $ 0.60. The maximum loss is $ 5, that the risk in this scenario means $ 4.40 – far more than in the previous example. This leads to a higher risk of trading – only $ 0.60 to 4.40 dollars in exchange for the risk that only a return of 13% equity.
The difference is the probability of success for the trade. The stock must be below $ 60 after closing and there are only $ 55 and you feel the stock is low and is even deeper in the risk premium on a credit account is high.
We have seen the difference between a configuration at low risk with a low probability of success for someone who is familiar with their own research – or a higher risk of trafficking, but a great chance of success. They are two alternatives for the credit spread trader. Whatever you choose depends entirely on your dealer’s personality. Maybe you want more information about a trade, but also ready to change the shape of the deployment of your business in a month after the date on which the future direction of stocks is not expected to receive.
Both examples assume a $ 5 difference between the exercise price of the option for the underlying shares. Of course, you can choose a large number of stocks found in only $ 2.50 or less between the strike price available. This will allow greater flexibility in how you distribute your funds. But remember, the only important thing you should know before you click the Send button, the risk-reward ratio.
