Credit Spread Options Strategy - Full Step by Step Tutorial

as a stock trader you can be for different things you can be a bull having an optimistic view on the market you can be a bear having a pessimistic view in the market you can be a pig holding positions long enough to watch all of your profits dissolve or you could be a part of the theta gang now before this week I've been a bull I've been a bear I most definitely have been a pig but I have never been a part of the data game now you've probably heard the phrase before Bulls make money bears make money and pigs get slaughtered now this can be rephrased as Bulls make money bears make money theta gang makes money and pigs pigs will always get slaughtered so in today's video guys we're gonna go over two of the strategies that the data again uses to profit in the market that will be put credit spreads and call credit spreads and then I'll show you guys the traits that I made using those strategies now if there's one thing like between bears Bulls pigs and theta gang members and that is that they all smash the like button on this video now after watching that intro you're probably thinking what is Theta and why is it part of a gang theta is the rate at which an option contract decays over time that's one of the Greeks that you have to consider when trading options and the gang part just comes from it being a group of option traders that uses this strategy so simply put theta gang is a group of option traders that will capitalize off of theta which is the rate at which those option contracts that they sell expire over time now instead of betting if the stock will go up or if it will go down these traders are betting that the stock will expire out of the money and worthless by the time of expiration now if you've been buying puts and you've been buying calls and you've been losing money there is someone else on the other side of that trade that sold you that contract and that is most likely a theta gang member now I know for some beginning option traders as well as for some option traders that are just accustomed to buying puts and buying calls this is a little bit more difficult of a concept to comprehend and to grasp onto from me just talking to you about it so that's why I want to jump into the charts I want to show you exactly how to place these trades how to profit from these trades and sort of the mindset that you should have while you're in one of these trades after that we'll go over the trades that I made using these strategies alright guys so I got the charts pulled up here let's go ahead and dive right into it first let's go over a put credit spread so put meaning that we're going to be on the right side of the options chain here we're looking at an April 15th expiration for the spy so I have the spy pulled up here before we go through the option in the strategy let's go ahead and build ourselves a scenario so that we sort of think through this logically so let's say we think that this the support and resistance and then this support here will turn into some further support as we move forward and as we go to April 15th which is the expiration so we want to say that the stock is going to say above 270 so let me direct let me go ahead and draw that 270 there I'll make it exactly 270 and I'll make this a green line because basically that's saying that we want the stock to get stay above 270 and we'll make money as long as it stays above there so what our first leg of this strategy is is to be selling a 270 put now the reason we do this is because think about it if you were to buy a 270 put where do you want the stock to go you want it to stay below 270 if we were to sell a 270 put we want the stock to stay above 270 right so when we do that first leg of the strategy we go here this is the options chain this is the bid of the ask price this is the strike prices here and this is the expiration so we see right here two point four four that's two dollars and forty four cents for that contract if we were to sell it that's the premium that we would receive so if we press that there we can see that the bid is 244 so for this for this example let's bring it down to that and obviously it defaults the ten contracts we want to go ahead and bring that down to one so how much we will we receive into our account for selling this put will receive two hundred and forty-four dollars right so the reason why there's another leg to this is because just selling a put which is that in this situation is selling a naked put is an extremely risky strategy so if we go to the snapshot analysis we can see the risk and reward ratio is here so max profit on just selling this put two hundred and forty four dollars now the reason for that is no matter where this thought goes it could go to a thousand all you're gonna be getting is the premium that you that you got originally so you'll receive 244 now the reason you'll keep that is because of this contract a 270 put will expire worthless if the stock goes to a thousand it'll expire worthless it'll go to zero and you'll keep that premium so there's your your max gain on this on this trade here now what's your max loss twenty six thousand seven hundred and fifty six dollars now why is that so this contract obligates you to buy 100 shares of spy at 270 no matter where this like the stock price is so if the stock goes down if it goes down to zero let's say it goes all the way down it goes in the money this 270 foot and it goes to zero that's your max loss so how do we calculate that you're obligated to buy 200 shares of spy 270 right $27,000 you always keep the premium no matter what so you subtract the 240 for that you receive the beginning twenty six thousand seven hundred and fifty six dollars if this pie goes to zero now the likelihood of that happening probability of maximum lost zero percent and I would agree with that there is zero percent chance that the spy goes to zero by April 15th the probability of maximum profit seventy three about seventy four percent so as you can see the risk reward in this strategy is terrible but the Mac is terrible but the probability of this hitting is high and the max loss is enormous now for personally for me that max loss is too big to weather and that's why there is another Lake to a put credit spread so the second part of this strategy is buying a put as insurance so if we go ahead and say we think that the stock will let's say we think it'll stay above 270 but we want to limit our downside and have the right to buy it at 268 so then that means we would then buy a put at 268 so right here you're buying that put tune-up two dollars and eight cents for that put to buy it now what does that do for us this gives us a spread of prices right so if we were to put a line here at 268 let me just move that a little bit so 268 and we're gonna make that red because if the stock goes below 268 we will hit our max loss and if it goes above 270 it'll be our max win now what is going on as we do this so we're receiving two dollars and 44 cents as premium so let's go ahead and move this down to the bid on both just for this example so we would be receiving two dollars and 44 cents to sell and we're going to be buying so giving out two dollars and eight cents - by now the difference between this is the spread and that's what we're going to be receiving so that's thirty-six dollars so we move this one will be receiving thirty-six dollars to make the spread now what is this buying doing for us so as you guys remember before we had a max loss all the way down to zero now we have a max loss up to 268 so if the stock falls past 270 and goes below 268 we are now capping our losses here at 268 no longer do we need to worry about any price below this because we have the obligation to or we have the right to buy at 268 which will then pay this obligation to buy at 270 so now we are capped at a loss below 268 so if we go to the snapshot analysis we can see that this is a much more conservative strategy and something that I would be more willing to take right so our max profit again is that $36 in premium which is the spread between these two and then the max loss is 164 dollars now how do we get to that 164 dollars so your max loss is calculated by taking difference between the strike prices so 270 268 so that's your difference here right so that's two dollars per contract so if we calculate that we have $2.00 per contract we have a hundred shares because that's one contract and then as you guys remember you always keep the premium no matter what so we're subtracting 36 so our max loss here is 164 dollars no matter where this stock goes it could go to 230 by April 15th and we would still only lose one hundred and sixty four dollars now I want to make a line here on April 15th just because it you know sort of gives us an idea of when we're going to be going until so that is exactly where April 15th so let's make that at 1600 so that's what that would be four o'clock on that day so 1600 on April 15th so what so as you can see as we sort of graph this out we would want the stock to stay above 270 here by this red line now if it's below 270 by this red line we'll be hitting our max loss 164 dollars the probability as it says right here 73% that it'll stay above 270 and it looks 21% that it'll be below 270 or 268 right so as you guys can see this is a strategy that sort of uses that theta that time decay of saying okay this stock will stay flat or it will go up and it will slowly decay over time and I want both of these options to expire worthless what we want in this strategy our main goal is that both of these expire worthless and we keep that premium alright guys so I hope that gives you a little bit of a better idea of how that put credit spread works how to place that trade sort of what the thing through while you're in that trade now I'm going to go ahead and go over the call credit spread so now that we're on the call side we're gonna be on the left side of the options chain the first part of this strategy is still to sell a call now the first part on this side was to sell the put now we're going to be selling a call so what do we have to think through when we're doing this strategy when you're selling a call you want a stock to stay below that strike price that you choose right because when you're buying a call you want the stock to go above that strike price so let's go ahead and think of a scenario here first so let's say that we think that this support here and then this resistance here will turn into future resistance by April 15th so we think that this stock will stay below 290 so let's go ahead and draw that line so 290 it's about 290 o 3 so we'll go there 290 and we'll make this green so as long as the stock stays below 290 we will be profitable so what do we do the first thing we're gonna do is we are going to press the sell here on 290 on the bid price right so 290 we're going to be selling that so if we go to 1 will be receiving 94 dollars if we just were to sell this now again the the loss the potential loss on this is very very high and in in this case it's actually infinite right now why is the max loss infinite because there is no cap on how high the spike can go there's no zero there's no no cap so in this situation your Mac sauce is infinite when you're selling a call and that is not something that I want to play around with and that's where you bring this spread this call credit spread into play so where do we want to cap our losses now that really depends on where you think the stock can go and also how much premium you want to receive for doing this so what you can do is you can cap your loss at 291 right you can just buy a 291 call you could create your line here at 291 and you cap your losses there now what you'd see is that you receive much less of a premium right because you're only in this case if you were to buy this 291 call you are now only receiving 12 cents per contract if you were to do it on the bid right in this case we're just gonna go to the bid to make it nice and easy to see you know what these prices are showing so you're going to be selling on the bid and buying on the Esk so you'd be receiving 12 dollars if you go to 112 dollars now that's you know a very small amount and if you go to your snapshot analysis you have an 82% chance of winning and your max loss is $88 right because it's it's one dollar spread times 100 that's $100 - what you received so that's 88 dollars so this is a you know more of a conservative trade right you your probability is pretty high you get 82% that you'll get that 12 dollars that both of these contracts will expire out of the money meaning that this stock will stay below 290 and your max your max risk is only 88 dollars now what you can do is you can widen that and what that will do is wills it will increase your risk but it will also increase your reward so you can do this on both sides you can do that on the call and the put side so we were to sell it to 90 and then we were to buy let's say a to 95 so in this case we are now let's draw this out so let's go to to 95 here so to 95 right about here so let's make that red so if the stock was to go above to 95 we would hit our max loss and if it was below to 90 we would be our max gain so what is our risk reward now so we're gonna get 58 dollars now for this price for this trade because the spread between them is 58 now if we go to the bid like we were before that's 55 so 92 minus 37 is 55 if you go to snapshot analysis we can see that now yes our max loss has gone up because we've increased this spread right so now our spread is $5 so we do 5 times 100 that's 500 minus the 55 that we got so we're now at 4 or 45 as a max loss where our max gain has increased with that max loss increase so you can see the probability is still similar 82% to a 9% max loss so our max loss probability has decreased now why is that because we've increased this spread and the only way we get to our max loss is if the stock is above to 95 so it's a little bit less likely that the stock will move past to 95 whereas before it was only to 91 so what we can see is if we were to deal with to 91 and we go to our snapshot we can see that it's now 15% right what's changes to 1 so that we make sure it's apples to apples so now it's 15% because it's more likely that if the spy breaks to 90 it may go past to 91 so what you guys can see similar concept you're creating those spreads you're betting here on a on a call credit spread that a stock will stay below a certain price at a certain time and on the put credit spread you think that the stock will stay above a certain price at the expiration all right guys so we went over the call credit spreads to put credit spreads hopefully that gives you a little bit more insight on how it works what to think while you're in those trades while you would enter those trades now I want to show you the two examples that I had trading put credit spreads and call credit spreads so jumping into it here the first trade that I had was on April 6th so that was I bought a 250 through our sold a 253 put and I bought the 251 put so you can see that I received 27 cents or 27 dollars because I bought one and I paid $14 when I bought that put so net there was about 13 dollars in premiums so very small amount now the reason it was so small is because once I graphed these out you can see how unlikely it was that these the spy would fall below 253 so at 9:50 I bought these which is right around here and the spy was trading at 259 now this stock would have had to fall down to here past 253 and down past 251 for me to hit any kind of max loss by the end of the day so that's a pretty big move if we calculate that move I can see the percentage so from when I bought it which is around here to let's say down to my max loss that was just about three three three and a half percent right so the spy would have had to fall three and a half percent on the same day for me to hit my max loss now I was winning I was willing to take that risk and I was able to lock in these profits right so as you can see these both expired out of the money option expiration out of the money and I kept that premium because at the end of the day the spy actually continued higher and closed around 260 for now the next day I did a call credit spread so on the seventh you can see that I sold a 280 call and I bought a 282 call so around the same time it was right around 9:50 5 10 o'clock I saw that the spy had double top and really started to fall so what I did at this point was I sold at 280 and I bought the 282 so if we go to 280 right around here and I salt and I bought the 282 so right around here so spy after this fall here would have had the spike path to 80 and passed to 82 for me to lose on this contract now these were expiring the next day so if I pull that up you can see that they are expiring on the 8th so I did hold these up until the 8th and as you can see the spy ended up closing at 273 and these both these options expired out of the money right because it would have had to go past 282 for these to expire both of them to expire in the money now as you can see I collected just about $30 for these that I think it was about $33 for this for this premium so I was able to keep that premium so I keep I made $33 on the call credit spread and $13 on the put credit spread so as you can tell pretty small amounts there but the probability of me winning these trades were very very high so I think this is a pretty good consistent strategy to make small wins and to take bets that you are you know more likely to win in the long term all right guys so that's gonna wrap up today's video on call and put credit spreads I hope that you guys learned a little bit more about the strategy and how to implement them if you have any other questions add me on stock to it so I'll put my profile right here ask me any questions you may have and if you don't have stock to it go ahead and add me on instagram the link is down in the description below if you guys enjoyed the video if you took something away from it make sure to smash that like button subscribe to the channel and I hope to see you in the next time peace [Music]

Channel: Vincent Desiano

Views: 23,282

Rating: 4.9381976 out of 5

Keywords: options, options trading, vertical spread, vertical spread options, call credit spread, put credit spread, theta gang, theta gang options, how to trade vertical spreads, options strategies, stock options, trading options, put options, call options, how to trade options, investing, trading, day trading, options for beginners, wallstreetbets, options trading explained, trading vertical spread options, options tutorial, put credit spread strategy, call credit spread strategy, money

Id: 4qG73tjRcpE

Length: 20min 13sec (1213 seconds)

Published: Sun Apr 12 2020