How to Trade Credit Spreads l Best Strategy & Tips l Options Traders Must Watch!

okay good afternoon and welcome back everyone to our options education webinar series my name is tony zhang i'm the chief strategist here at options play and today we're here to talk about a strategy that is one of my favorite strategies and for those of you that follow us here on options play you know it's a strategy that we use fairly often so today we want to break down the strategy make sure you understand the best practices around the strategy and know where to find the most optimal options credit vertical spreads especially the ones that provide an edge in your favor so let's go ahead and get started but before we do what we're going to discuss here today is purely for education and demonstration purposes it is not a solicitation or recommendation to buy or sell any specific securities so today we'll start off with just a broad understanding of what our credit spreads just for those of you that are new to make sure you understand how they're constructed why we trade these credit spreads and then we're going to go through two examples of the bullish and bearish example just to make sure that you understand the construction and the motivations behind why you want to sell a credit spread then we'll talk a little bit about the optimal credit spread how do you want to find the right expiration date the right strike price for these and then we'll give you a few different variations that we tend to see a lot of traders trade how we find spreads that we consider optimal how do we find spreads that perhaps are giving us an edge in our favor and then how do we look at uh you know credit spreads that other people like to trade and what what risks and rewards you have with all of them we're gonna we're gonna discuss a few different types of credit spreads then we'll talk a little bit about managing them because it's one thing to get into the trade it's a whole nother thing to figure out when to get out of the trade so we'll talk through the rules that we have here at options play that we follow when we send you the alerts for the daily play as to when we get out of a credit spread and then i'll show you how you can also find credit spreads that have an edge in your favor using the tools that are available to you here at options play and then at the end we'll open this up for q a but the primary question that i want to help investors answer on from today's session is how can i find and trade the most optimal credit spreads so we'll talk a little bit about what those mean and how you can find these using the options play platform so my name is tony zhang i'm the chief strategist here at options play and specifically for those of you that follow me on cnbc you'll know that i trade a lot of credit spreads on cnbc it's probably the one strategy that i use the most out of all the different strategies that we trade on that show so that's why i wanted to dedicate a whole webinar just to explaining the strategy explaining why i use it so often and why i've been so successful using this particular strategy on cnbc so talking about when should you use credit spreads so you know before we talk about what credit spreads are i'll talk a little bit about when should you use it because it's really quite important that it's not suitable for all environments they're only suitable for certain types of of environments and generally speaking uh they're great when you've identified a new supporter resistance level and you believe the stock is going to rebound off of that support level whether that support level is something like a moving average that you think the stock's going to bounce higher or from or perhaps you believe that the stock has broken below a support level and you think it's going to start moving lower but generally speaking overbought and oversold conditions are great as well as trading ranges whenever you believe that the stock is trading in a range you can use that top of that range as opportunities to sell credit spreads whenever a stock reverses position reverses direction those are opportunities to sell a credit spread now the rule of thumb with credit spreads is that they're generally useful when you have a small when you're expecting a small directional move what do i mean by that um you have certain opportunities where you expect the stock could make a big move such as earnings catalyst or some kind of product release some kind of launch some news related event where you believe that the stock can make a big move that is not the type of time that you want to use you want to sell a credit spread um and only when you expect the stock is going to make a muted or small move do you want to sell a credit spread now it also is better in a higher volatility environment so we'll talk a little bit about that uh during today's session but generally speaking when we're looking at credit spreads higher implied volatility environments are optimal for selling credit spreads we're going to look through that in our examples when we look at some optimal credit spreads so let's talk let's look at two examples because i think that's the best way to understand this type of strategy now before i jump into the strategy itself can everyone please bring up the chat window at the bottom of your screen and please type 1 into the chat window if you have traded a credit spread before and please type two into the chat window if you have never traded a credit spread before okay i see a lot of ones but i also see a fair number of twos so for those of you that have never traded a credit spread we're going to go through a quick example so that you understand what this strategy and how what the strategy is and how it's constructed so i'm going to use this example of ibb ibb is currently trading at about 142 this is an old example so this is not the current price of ibb uh but at the time that we were looking at this ibb has been consistently uh uh you know using the 21 day moving average has consistently been a nice support level so on the pullback here towards that 20 day 21 day moving average maybe you felt that the stock was go or the index the etf was gonna bounce a little higher here so there's lots of plate trades that you can make to take a bullish view on a stock you can buy the stock you can buy a call option you can also sell a put option so here what i'm doing here the stock is currently trading just shy of 142. what i do is i sell a 142 put and let's say i collect five dollars and 10 cents for that uh etf by selling the 142 put that is in itself a bullish strategy this way if ibb stays put if it stays sideways if it moves higher i make money even if the stock goes a little bit lower i can make money because if i sold the 142 put for five dollars and 10 cents uh my break even price is effectively around 137 or so so as long as ibb stays above 137 i'm profitable this is a very forgiving strategy meaning if the stock goes high higher if it goes lower i make money only if the stock drops substantially do i lose money on this trade now it's a very popular strategy amongst traders however there is a substantial downside risk a granted ibb as an etf is unlikely to drop very sharply because there are 30 40 different names in this etf but it is possible if you're trading an individual stock or if you're selling a put credit spread a put that the stock where the etf drops substantially and the further the stock drops or the further the etf drops the more you have to risk when you just sell a put option and not everyone is comfortable taking on that risk and in addition to that when you sell a 140 put you have to put up roughly 14 000 in capital just to sell that one put not everyone has that kind of cash laying around so what is what can you do you can actually reduce the risk and reduce the margin requirement by buying a lower put in this particular case let's say i buy 136 put pay 2.95 what happens is i've reduced my the premium that i'm collecting here by roughly three dollars so my net credit instead of five dollars and ten cents is reduced down to two dollars and twenty five cents but what i've done is when i sold the 142 put i'm taking effectively roughly fourteen thousand dollars worth of risk if ibb went to zero when i sell a credit spread like this what i what i've done is i've reduced my risk my risk is calculated based on the distance between the two strikes the distance between the two strikes so the distance between the two strikes is this 142 and 136 that's six dollars wide so my vertical width is six dollars whatever i collect in net premium here which is two dollars and 25 cents the rest of that six dollars is going to be my max risk so when you sell a credit spread these are defined risk strategies and defined max reward strategies meaning whenever you sell a credit spread you know exactly how much you can potentially make you know exactly how much you could potentially lose and it's determined based on the distance between the two strikes so in this particular case because i collected two dollars and 25 cents the rest of that six dollars is the three dollars and 75 cents that i'm risking now this is a pro this is also a forgiving strategy similar to the short put because this strategy is profitable as long as the stock stays above 397.75 which is a 142 minus the 225 these two it's it's basically subtracting 2.25 cents from a dollar 42 i'm sorry 142. that's how i get the 139.75 so if ibb rises as i expect i'm gonna make my 2.25 cents if ibb moves sideways meaning it doesn't move higher but it also doesn't move lower i also keep my 2.25 cents as long it stays above 139.75 i'll be profitable so if it goes in the direction i expected to i make money if it does just move sideways i make money if it moves just a little bit lower i can still make money only if the stock drops substantially or the etf drops substantially do i risk some capital or have a loss but even if the stock drops to a hundred i'm still only risking three dollars and 75 cents so the reason that you sell these types of credit spreads is because if you just sold the naked put a you're taking on substantial risk if the stock if the stock or etf drops substantially you take on substantial amount of risk and maybe you don't want to take on that risk but the other thing is that it's also extremely cash it's it takes up a lot of cash to sell a naked put you have to put up you have to put up margin in order to do it if you're not you if you're selling a cash secure put you have to put up close to fourteen thousand dollars and sell a single contract not everyone has that not everyone wants to do that so one of the ways you can reduce that risk and reduce the capital requirement that it that it takes for you to get into the trade is to sell a credit spread this way you have a defined amount of premium that you're collecting that's your max reward and then the rest of the distance between the two strikes is your max risk does that make sense everyone please type three into the chat window if this strategy makes sense to you perfect okay so the the reality of why people sell credit spreads really comes down to the fact that it's a forgiving strategy if you get the direction right you make money if the direction just moves sideways you make money even if this if you get the direction wrong a little bit you can still make money only if the stock goes completely in your against you do you risk that max risk and even in that particular case you've defined that max risk unlike buying a call option if let's say i bought a 142 call for five dollars then my break even price is 147 then the stock has to shoot up beyond 148 149 and 150 before i'm even profitable so if the stock moves a little bit higher if it moves sideways and moves lower i lose money in all three scenarios only if the stock makes a big move to the upside do i make money and that's not always easy to do so that's the difference between buying an option which requires a big move in the underlying stock versus selling an option which even if the stock doesn't make a big move you can you can still be profitable and you can trade this on both sides you can trade this both on the bullish and bearish side so let's say for example what if you know i think that ibb is kind of exhausted it's made its moves higher here i think it's going to start pulling back a little how can i take a bearish trade well you can do the same thing you can sell a 142 call option for roughly five dollars here you get about four dollars and 80 cents and but one of the things you'll you'll learn is that if you sell a naked call a you take on unlimited risk so meaning if the stock takes off continues to move higher the further it goes higher the more you have to risk number two you have to put up a fair amount of margin in order to sell a naked call again not two scenarios that everyone wants to take so what you can do is you can reduce that risk again by buying back a higher call option here so instead of collecting 4.80 for just selling the 142 calls you pay 225 for the you pay 225 for the 148 calls and now you're collecting 2.55 cents again the distance between the two two strike prices is six dollars so when you collect two dollars and 25 cents out of the six dollars your max risk is three dollars and 45 cents in this particular case we're collecting roughly 42 of the vertical width because 2.55 cents is 42 and a half percent of the six dollars so this strategy is profitable as long as ibb stays below 144.55 which means if ibb moves lower i can profit if ibb moves sideways i'm also profitable if ibb moves a little bit higher as long as it stays below 144.55 i can be profitable only if i get the direction completely wrong and ibb moves substantially higher do i risk 45 cents so again forgiving strategy because in scenario one scenario two scenario three i make money only in scenario four do i lose money conversely for a lot of bearish traders they'll typically buy a put option so before we looked at the 142 put was five dollars so this stock would have to get down to about 137 or so roughly here before the strategy makes profit so if you bought a put option only in that one scenario do you make money if if you get the direction right but it doesn't move far enough guess what you're gonna lose money if ibb stays sideways you're gonna lose money if ibb goes higher you're gonna lose money so basically in scenarios two three and four you're going to lose money if you bought a put option only if the stock dropped substantially do you make money on that trade so that's this that's the two sides of buying an option versus selling an option and many of you may have heard um you know you may have heard people say that professionals prefer selling options it really comes down to this is the fact that probability for just from a pure probability perspective you're more likely to be profitable selling options than buying options but when you sell options you have unlimited risk or a substantial amount of risk especially if the trade goes in your favor it goes against you and that's why selling credit spreads gives you this the ability to sell options but do so in a way with limited risk does that make sense everyone please type 4 into the chat window if that makes sense to you perfect okay see a lot of fours so let's talk a little bit about now i just gave you some examples let's talk a little bit about if you were to sell a credit spread what are the optimal credit spreads so when it comes to expiration dates 45 days to expiration is going to be your optimal credit spread a lot of investors ask why don't you sell short a dated options why don't you sell long and dated options it really comes down to trying to capture the most amount of time decay per day without taking on a lot of gamma risk because whenever you're short an option gamma risk is what works against you it's what makes very large swings in the underlying p l based on moves in the underlying stock you don't want that when you're short an option because if you're short an option the stock makes a move against you you're going to lose a lot of money and the goal is to try to minimize that gamma risk so the crossover at which time decay starts to accelerate is as you get closer and closer expiration that's why i tend to find there are a lot of people that sell one-week credit spreads three-day credit spreads even credit spreads that are expiring that same day because they're thinking to themselves that i'm maximizing time decay but the reality is that on the back end of that when you get very fast time decay you also have very high gamma risk so the goal here is to figure out at what point does the acceleration and time decay outweigh that gamma risk so going out 45 days you have very little gamma risk you still have plenty of theta time decay per day so that's why we start out selling 45 days out now we always buy a cell the 40 the 50 delta caller put so the at the money caller are put and then buy back a 25 delta call or put sell the 50 delta by the 25 delta and we'll show you on the options play platform how you can seek that 50 delta and 25 delta it's on your options chain and when you use this type of of expiration date and strike price you'll generally find that the credit that you receive meaning the income that you collect on this credit spread is roughly going to be 33 percent of the distance between the two strikes so if you're selling something that is whoops if you're selling something that's ten dollars wide so if you sell the 100 whoops you sell the 100 you buy the 110s that's ten dollars between these two strike prices you'll find that you'll usually collect roughly about three dollars and 33 cents on that credit spread one third of the distance between the two strikes now when you do that you'll tend to find that these are relatively higher probability of profit winners 67 percent winners and you're going to risk roughly 200 dollars for every 100 in potential rewards so i want to i want to dive into this a little bit why we consider this the optimal credit spread so to understand this a little bit this is the illustration that we have right so let's say in this example i'm selling the 100 call option and i'm buying the 110 calls so it's a 10 wide credit spread so when you use sell the 50 delta buy the 25 delta call what you're going to find is that you're going to roughly collect one third of the distance between the two strikes in income and remember we learned that whatever you collect an income the rest of it is going to be risk so if you're collecting three dollars and 33 cents in income then you're going to have 6.67 cents in risk that's a different the if you add up those two numbers you're going to get the ten dollars the distance between these two strikes that's how that's how credit spreads or vertical spreads in general work so when you use this type of credit spread whoops when you use this type of credit spread that means for every one dollar in potential reward that you're collecting every one dollar you're collecting you're going to be risking on the back of that roughly two dollars and when you have a two to one risk reward ratio in order for you to break even in the long run trading this type of strategy you need to have roughly 67 of your trades to be winners just the break even that means that if you're right 70 of the time you'll be profitable if you're right 65 on time you'll actually lose money in the long run that's just how odds and probability work so just so you know this is the optimal credit spread meaning if you just flip a coin you're going to win two out of uh you know 67 of the time and then every single time you win you win one dollar every time you lose you lose two dollars but you're gonna win the one dollar more often meanings if you win 67 of the time then two out of three trades you're gonna win and then the third trade you make you lose two dollars two out of three three trades you make one dollar the third trade you lose two dollars so at this at this rate you basically break even you're not really making any money on this trade what you need to do is you need to have a bit of an edge you need to have a bit of a directional edge meaning you need to be able to call the directional view of a stock or etf or whatever asset you're trading that credit spread on more often you need to call the directional view more often than not in order to be profitable with this trade so this is what we call the optimal credit spread now what we try to do here at options play is we don't want to just find the optimal credit spread we want to find in credit spreads that provide an edge and how do we do that what we do is we we find credit spreads where the income that you collect in this particular case in the same 10 wide credit spread if i'm selling the 100 call option and i'm buying back the 110 call option we're searching the entire market for credit spreads that are the 50 delta 25 delta credit spread but instead of finding ones that have 33 of the premium we try to find ones where we can collect 40 42 of the premium and many times we're able to do that because when we're able to collect four dollars out of a ten dollar wide credit spread what that means is that we are risking only six dollars on the back of that and that might not seem like a whole lot of a difference right before we were talking about three dollars and 33 cents to 6.67 now we're talking four dollars to six dollars that doesn't seem like a whole lot but that small shift in in by by increasing our income that decreases our risk what that improves the trade by is for every one dollar in reward that we collect we're only risking a dollar fifty before for every one dollar we collect we're risking two dollars and when we reduce our risk by by that by that just in this particular case what is 67 cents we only need sixty percent of our trades to be winners in order to break even what that means is that if we're right sixty-five percent on per sixty-five percent of the time on our trades we'll be profitable in the long run only if we're right let's say fifty-five percent of the time will we be unprofitable in the long run does that make sense everyone please type 5 into the chat window if that makes sense to you so if you're if let's say if let's say every single every you make two trades and you win you win one dollar each time and the third time you lose instead of losing two dollars you only lose a dollar fifty now you've net come out profitable because you've won two dollars and you've lost a dollar fifty that's that means you have netted a dollar and you do that again you net another two dollars and then lose a dollar fifty you net another two dollars and lose a dollar fifty and as you can see if you if you use this type of strategy in the long run you'll net out 50 cents each time and you keep making more and more money that's the edge that we're trying to seek when we're using uh options play and our technology to scan for these types of um credit spreads that provide an options edge and for those of you that follow me on cnbc you might hear me all the time whenever i talk about credit spreads about how i try to find credit spreads that collect close to 40 percent of the width this is what i mean on that show is i'm referring to finding these higher probability sorry not higher probably trying to find these credit spreads that have a slightly better edge in your favor and many times that edge might just be 10 or 15 cents and it doesn't seem like much but it makes a big difference in the long run and the reason i bring this up is because the most consistent question that i get from investors about credit spreads is not how do i find these optimal credit spreads how do i find you know credit spreads that give me the most amount of income so i can reduce my risk the number one question that i get with credit spreads is how do i find high probability credit spreads how many of you have heard that or how many of you have tried to seek high probability credit spreads please type yes into the chat window if you are a trader of high credit credit uh high probability credit spreads or if you've tried to seek it you know and i totally understand why you would want to seek high probability credit spreads because if you can win 80 of the time 90 of the time doesn't that sound great that if i can win 90 of the time i'll be profitable right as because i'm winning 90 of the time but the set but the reality of that is that when you seek these high probability credit spreads what that means is that you're selling these really far out of the money credit spreads and when you sell these really far high probability credit spreads what you're doing is you're reducing the income that you're collecting as much as possible that's how you have high probability trades is you're reducing the amount of income that you're collecting now what happens when you reduce the amount of income that you're collecting what happens is you increase your risk substantially relative to the income that you're collecting so when you see these credit spreads that have 95 percent probability of profit on paper that sounds great right i'm going to be i'm going to win 95 of the time but this is what we call in the industry picking up pennies in front of a freight train yes you win all the time but you're winning very small amounts every single time you're winning literally pennies right many of these credit spreads you're collecting 30 40 50 cents and you're thinking to yourself great i'm doing a really good job of collecting 40 50 cents every single day or every single week or however often you're trading this but on the back of that you're taking a monumental amount of risk for that 20 30 40 50 cents so when you seek these high probability risk reward high probability trades what you're really doing is you're skewing the risk reward very far in your against you now that in itself is not the problem and it's not for me to sit here and tell you that those trades are bad and the reason for that is because we all have different risk tolerances i there are plenty of people out there with much higher risk tolerances than i and it's not for me to tell you not to take risky traits everyone is sits on a different part of the risk spectrum some of you are very conservative some of you are very aggressive some of you very uh are willing to take on risks so it's not for me to tell you don't take risk right that's not my job my job is simply to educate you on what those risks are and it's not necessarily the skewed risk reward here that's really the problem the problem is that the higher the probability of profit on your trade the worse your risk reward is and the worse your risk or reward is the more you have to win just a break even so when you take on a trade with a nine to one risk reward ratio meaning for every one dollar you risk you you for every one dollar you collect you have to you're risking nine dollars you have to be right 90 of the time just the break even which means that you actually have to get the direction of the market right about 92 93 95 of the time otherwise you are going to be unprofitable in the long run you could win eight out of ten you can wait you can win eight times in a row and then have one bad month you know one stock goes against you big move happens then the market takes sells off and you're wiping out weeks sometimes months perhaps even years worth of games in one single month or one single week so it's not from it's not that that's a bad thing per se it's just is that what you want for your trading do you want to win all the time and then have one trade that could potentially wipe out all of your gains months of of gains and i know i've spoken to so many of you here you guys have written to me you guys have told me about experiences about doing these types of credit spreads not really knowing the risks until you had one bad month that wiped out months worth of work so i'm hoping for those of you that have not gone down this route yet to hopefully this illustrates to you the risk of what you're doing when you sell these very high probability credit spreads whether you're looking at iron condors or credit spreads or whatever types of strategies they are there are plenty of them out there just understand that the higher the probability of success the more you have to win the more often that you have to win before you can be profitable with this type of strategy so the 99 probability of profit credit spreads that you sell you better be right on the markets 99 of the time otherwise you will lose money in the long run so that's the lesson to learn here with those high probability credit spreads so i hope that by showing you the different spectrum of credit spreads it gives you a better sense for not what's better or what's worse but just what what makes more sense for you do you want to be the type of trader that sees this type of of of risk profile in your portfolio like is this the type of um p l you want to see in your portfolio or is this the type of p l you want to see in your portfolio for me it's very clear i'd much prefer to be in this type of category i'd rather that when i have a bad month or bad week it wipes out maybe the previous few weeks worth of work in in one go you know in a bad month that i'm not wiping out weeks or months of work here versus the other way around you might look like a very steady and consistent trader but all you need is one bad month to wipe out almost everything so that's just my preference hopefully this illustrates to you the spectrum of risk and help you decide where you want to sit within that spectrum of risk so let's talk a little bit about how do you find these high prob these sorry how do you find these option strategies that give you an edge so on a 10 wide credit spread how do you find ones that maximize income and minimize risk right so you know at least for me that that's what i'm seeking for on this type of trade so uh actually before sorry before we get to that let's talk a little bit about um managing these trades uh we'll come back to how do you find these optimal the optimal credit spreads so when it comes to a credit spread it's a little trickier to manage credit spreads than it is to manage debit spreads debit spreads are fairly straightforward credit spreads require a little bit more work it's not that difficult but it requires a little bit more work because there are effectively three rules that could potentially trigger the exit of a credit spread and those three rules are either take profit a stop loss and a days to expiration whichever one of these three triggers triggers first that is your signal to exit the trade so the first rule to exit is when you've reached 50 percent of the max gain that's when you want to take profits the second rule is exiting at 100 percent of the max gain of a loss so that's your stop loss level and then the third one is if the trade gets to 21 days to expiration without triggering either the stop loss or take profit rule you also get out regardless of how much money you've made or lost on that trade now whenever we talk about exiting the trade you can exit and roll it to the next month if you want to if you want to look for further gains if you still think the directional view of that stock is still you still you still agree with the original directional view you can roll it but this is always going to be the trigger at which you either exit or roll the credit spread so just to walk you through an example if i sold a ten dollar wide credit spread which is the examples we've been talking about and let's say i collected four dollars on that credit spread so i've collected forty percent of the width of the ten wide credit spread what i want to do is i want to take profit when i've made half of the max reward so if i collect four dollars that's my max reward so once i made half of that two dollars that's my time to take my profits and and move on to the next trade now if the same four dollar wide four dollar credits a ten dollar wide credit spread that i collected four dollars on is now trading for eight dollars meaning i've lost 100 of my max gain then it's also time to cut my losses so if i made two dollars i basically take profits if i lose four dollars i basically cut my losses now if the trade gets to 21 days to expiration and i haven't triggered my stop loss or my take profit level it's also time to simply exit the trade and again if you still believe in the directional view of the of your original credit spread you can simply roll it out another 45 days if it hasn't triggered both the stop either the stop loss or the take profit level and you've gotten yourself to 21 days so that's how you generally manage a credit spread and for those of you that uh you know for those of you that may not be able to sit in front of your screens all day long i recently posted a video on thinkorswim on how you can how you can create a bracket order a good hill cancel bracket order to bracket a credit spread that you're selling so i don't have the time to watch every single one of my positions every single day and and figure out when it's time to take profits when it's time to cut losses i simply place an order within my thinkorswim platform that effectively brackets the trade so what as i said i take profits at 50 and i and i and i cut my losses at 100 of the max gain and i can put in an order within thinkorswim to do so so for those of you that want to review that video i'll post this link into the chat window you can view it after today's session it'll be in the slides that i send out with the recording but it basically shows you how you can place a stop loss and a take profit level at the same time using thinkorswim and one will cancel the other meaning if the stop loss triggers it'll automatically cancel the limit order and then if the limit order triggers it'll automatically cancel your stop loss order and you can do this on vertical spreads and that's one of the reasons why i trade a lot of these spreads at thinkorswim so watch that video for those of you that are interested in learning how to do that so let's now talk about finding these credit spreads that give you that advantage that give you that edge so we have a tool at the bottom of your options play platform everyone here has access to it as a member there's a credit spread button at the bottom of your options play platform and what credit spread opportunity report uh does a few things it filters first of all only very liquid optional symbols so you never have to worry about liquidity on anything that we produce on this report it is credit spreads that collect a minimum of one-third of the width minimum of 33 but most of the report actually collects closer to 40 you can find and it's actually sorted for you based on how much we collect as part of the width the higher the percentage the further it goes up on the list and what we also factor into is our directional view we also line up our technical view with these so anything that you see on our report it lines up with our technical view it passes the liquidity filter so you know that you you're going to be able to get filled on this type of trade at or near the mid price and where we've we've uh sorted it for you so that the ones with the most amount of edge are at the top of the list and then you also have um so you have the symbol in the direction so you know which whoops you know what symbol and whether whoops what symbol in which direction we have the bullish or bearish view we show you exactly what expiration date which strike price to buy and which strike price to sell you see exactly how much premium you're collecting what is the width and calculated for you in percentage terms so that you can quickly see uh this apa bullish put credit spread collects 40 percent of the width and then you also have volatility and earnings so before i talked about the fact that credit spreads are are most optimal in high volatility environments it doesn't mean that low volatility environments are not good because as you can see here here's one on fitch ratings its iv rank is only seven percent a lot of investors when they see seven percent they walk away from that they say i'm not going to sell anything on it but i'm still collecting 39 of the width now if i believe in the directional view of fitch ratings i will still take that because i'm risking only about a dollar and a half for every one dollar in potential reward i will take that trade if i if i agree with the directional view especially from a technical and fundamental perspective and you know this stock doesn't report earnings for another 76 days so especially if i'm bullish on the markets and i think a stock like this will likely drift higher along with the markets and i'm you know there's no reason why i wouldn't take this trade despite the fact that iv rank here is relatively low now it is true the higher the iv rank the more likely you'll be profitable on that trade but the edge between something with high iv rank and the edge between something a low iv rank is not that large it's not like it's it's not night and day so don't use iv rank as an immediate disqualifier for selling options i i know a lot of people do and i know a lot of investors have been taught this and this is and for those of you that joined me yesterday with tom sasenoff i love tom but it's one of my gripes with what he teaches you know i i understand that generally speaking high iv rank is good but low iv rank does not disqualify you from selling premium on a credit spread so let's just take a look at this report this was a report that was generated right before today's session here um you know i i i don't trade palantir very often i don't love the stock i don't love the fundamentals of that stock but right now it collects forty three percent of the width it's interesting enough to look at but palantir also hasn't traded has not traded very long so we don't calculate an iv rank on it twitter is one that i'm more familiar with it's one that i trade fairly often so let's just take a look at twitter here this is a bullish trade here on twitter it's telling me to sell the 67 50 whoops 67 58 put credit spread that expire on april 30th that collects three dollars and 74 cents on a nine dollar wide credit spread which is 42 of the width so when i'm collecting 42 percent of the width my risk reward ratio is actually fairly close to one to one right for every one dollar i'm potentially making i'm risking only about a dollar 40 or so so i'm not risking a whole lot even if twitter falls apart even if you're concerned that all the tech stocks are going to continue selling off i'm only risking a dollar 40 and if tech bounces higher or just simply stays where it is i'm collecting a fair amount of width and look iv rank here is only 11 a lot of investors will walk away from that from from selling something on twitter because of the iv rank but it doesn't report earnings for another 42 days so i have plenty of time to look at this particular trade now i'm not saying that this is the best timing right now on going long tech right twitter's down five percent here today but maybe you think that this is a little bit oversold and it's about to bounce higher here but that's exactly what we're seeking here we're looking for these opportunities sometimes when you get these big moves to the downside sometimes you get some mispricing on on options or simply just options premiums are favorable for this so if i sold the 67 uh 58 what was it fifty sixty sixty seven fifty eight yep um as you can see here i'm collecting three dollars and sixty cents on a nine dollar wide credit spread so again three dollars and sixty cents divided by nine dollars that is exactly forty percent so that's how i'm able to collect uh you know a credit spread so if i get a bounce higher here so even though even though twitter is down five percent here today if i do get that bounce that i'm able to reduce my risk and even if it continues to move lower here i'm only risking one and a half dollars for every one dollar that i'm collecting so this report takes all of the work from from figuring out what symbols are are most liquid uh you know what iv rank is uh finding the credit spreads it does that work for you it applies exactly what i taught you the 45 days the 50 delta selling the 50 delta strike buying back the 50 delta strike it does all of that work for you and it does it across all liquid symbols every single hour this report runs across all liquid symbols and only shows you the symbols out of the few hundred symbols there are only shows you the ones where you're collecting at least one-third of the width if you're collecting less than one-third of the width it throws it out of the report if it doesn't agree with the directional view it throws it out of the report if it's not liquid it throws it out of the report so out of the 4200 symbols that you can trade options on look at how the list only has 18 17 ideas here for today for this particular hour it filters out 99.9 percent of the optionable universe for you and only provides you with credit spreads that meet these these requirements that we refer to here today so this tool allows you to find these opportunities like i said it's at the bottom of your options play tool click on the look i'm sorry sorry click on the credit spread link here at the bottom of your options play platform right here and when you click on that it generates this report this is a report that generates every single hour so between about 10 20 am and 3 20 pm this runs every single hour you can go to this link you can click on that link at the bottom of your platform brings up this page and it refreshes refreshes every hour and will give you the credit spreads that provide the highest amount of edge for in your favor so with that that covers what i wanted to share with you here today i hope that this was helpful in number one educating you a little bit more about this strategy because it is a more advanced strategy there's a lot of nuances to this strategy and i completely understand why investors seek the exact opposite of what i believe is to be the optimal option strategy which are those really high probability credit spreads that sound really good because you can make money 95 99 of the time but in reality you have to be also right 95 99 of the time in order for that strategy to be profit in the long run so today hopefully illustrate to you why i don't seek those trades and why i seek these particular types of trades and how you can leverage our technology and our platform to find them for yourself and replicate the same traits that i make on cnbc uh that i find and again this is by far the most pro most profitable and the most common trade that i make on cnbc there's a reason that i trade these very often um and it and it's because of all the things that i that i showed you here today and here's a way that you can replicate that here as well so with that thank you so much for remember to our members for supporting us allowing us to continue to do this if you are currently on a free trial once you're once your free trial is up i hope that you can consider supporting us and allowing us to continue to do this and so that you have access to these tools and these reports for your own membership is only seventy five dollars a month or five hundred dollars a year and you can subscribe using those link here on your screen trade that options play dot com slash member and if you have not signed up for a free trial you can do so at optionsplay.com have access to everything for 30 days try it out before you start your membership so with that thank you so much for your time here today what i'll do at this point is i'll open this up for q a there is both a q a section and a chat section so please if you could bring up the q a section which is at the bottom of your screen i will answer questions out of the q a section not the chat section so please if you have a question posted into the chat window and once again if you're interested in in placing a bracket order which i recommend for those of you that are not glued to your screens all day long you know especially in a fast-moving market you want to make sure that you have orders put in place for both stop losses and take profits it has recently been brought to my attention that most brokers do not support oco orders bracket orders like this for options spreads i was actually a little surprised to find that out but it does seem to be that case because after i posted this video a couple of weeks ago i got a lot of people reaching out to me saying how do i replicate this at my own broker and and i said you know contact your broker i'm sure they have it and i was surprised to find the number of people who got back to me and said you know my broker doesn't support this um so this is one of the reasons why i do trade a lot of my spreads at think or swim is because of this ability to um place an order and know that i'm protected on both sides through a stop loss and take profit order so with that let's take a look at some of the questions here from today um how often will someone be assigned in your ibb bear call example uh so here's the thing chris the reason that we rolled this out 21 days from expiration is because your risk of being uh assigned early to more than 21 days from expiration is virtually zero i can tell you that i've been trading credits for a long time and i have never been assigned because a i'd never hold them to at 20 um below probably 14 days that's probably as low as i'll ever go and even at 14 days your risk of an early assignment is virtually zero so that's why we rolled this so far out you never have to worry about early assignment tony i like the new slides they really help make things clear question when is the optimal time in the 45 day to roll a losing credit spread so the losing credit spread is if you've lost 100 of the max gain close it out and roll it if you want to hold on to it or if you're at 21 days to expiration and you haven't hit that 100 percent stop loss level also roll it you know on a losing credit spread michelle is saying hi tony on your daily play trade idea today you sold the credit spread on dhi uh 36 days versus april 30th 43 days is there any reason you selected uh 36 days so michelle i mean you have a choice so it sometimes i tend to find that the 45-day weekly option uh the spreads are pretty wide and they're not traded just actively enough yet dhi is not as as liquid as let's if we're trading like apple or facebook so that's why i chose a four uh 36 day option here on dhi um but usually we can find enough liquidity in the 45 day option dhi is somewhat liquid it's not a very liquid that's why i chose to use a slightly lower trade but you know 30 to 45 days anywhere in that window is suitable for a credit spread grace is saying hi tony i still have a month until my credit spread expires i did not take profit yesterday p l was 25 yesterday now my portfolio's basically sit there nothing's changed should i wait to roll my position earlier um no i mean grace you know the the reality is that when you hold on to a credit spread you're going to see swings from day to day i understand for a lot of people who are along the markets using through credit spread today was not a particularly good day it really depends on whether you think markets are going to correct lower or not tomorrow morning during the market friday market outlook session i'll be addressing some of that and so if you want to come tomorrow morning you'll be able to do that you'll be able to do that during that session how many how many trades are we typically required to make in a year to be profitable in a year ooh i've never gotten a question like that how many trades are we typically required you're not required to make any number of trades you know um you know you can if you're talking about selling credit spreads i mean think about it you're selling them every 45 days right so minimum you're you're trading probably at least seven to eight trades a year but more likely you're trading multiple ones at the same time so i tend to find that most credit spread traders are trading at least a few times a month uh but you know you don't have to sell credit spreads you could just buy spy and hold on to and never trade and be profitable there's there's no requirements uh as far as number of trades to be profitable if you exit at 50 of profit how does that affect your risk reward outlook so as long as you maintain this 50 and 100 percent your risk to reward ratio does not change because i'm still trying to reach roughly that two to one risk reward ratio for every one dollar i collect i'm risking two dollars but then if i'm only doing this one dollar and versus one dollar and a half risk i maintain that integrity here with the stop loss and take profits credit spreads work only on one expiration date i'm not sure what you mean by they only work on one expiration date they work on they work on any expiration date but the optimal expiration date that we use is roughly 35 to 40 days out is where we start selling those credit spreads why was pdd iv stock rank with red at 24 is that because it is a bullish put and for buying that might make it more costly than had a low iv rank um chris i'm not sure is the question what why it was why it was red is that the question chris about your pdd question um the iv rank is just color coded the higher oh okay the higher the the iv rank the more red it gets you know like red means sell green means buy kind of as it was the thought process here so something a very low iv rank um you know is generally speaking as as as um tom would say low iv rank is better for buying options high iv rank is better for selling options and and i and that general statement is true but there are plenty of exceptions to that rule i think is what i'm trying to say uh you went over the criteria used for identifying optimal credit spreads can we run a similar scan in tos um ray you might be able to i just don't know that you'd be able to sort by this one column and that's the most important column for me is sorting based on premium that you're collecting based on a percentage of the width so i know thinkorswim has a spread hacker but i don't know that you can sort by this one column and our scans are sorted by this one column can you explain why i should not be concerned selling a put that's already in the money as part of a credit spread for some reason i can't get my head around that first of all one we're not selling credit puts that are in the money we're selling put puts that are at the money and number two i don't think you should sell an in the money put that's not what you should ever do but number two you have no your risk of early assignment is virtually zero because of this rule if you sell a 45 day option and you roll it 21 days from expiration your risk of assignment is zero no one's going to no one's going to assign a put early and one no one's going to sign a put early because they're going to lose the entire extrinsic value of three weeks of time and they're basically giving away free money if they do that that's money in your pocket and number two even if you get assigned early on a put credit spread the risk does not change you're just replacing a short option with a stock leg those two have the same risk and you still have the long option that protects you against that long or short stock lag so if you ever find yourself assigned early on a credit spread simply just close out the stock leg and the long uh option leg that you have left and the risk does not change and think about it the person who exercised the call or put early they gave up that extrinsic value that is gained by you you immediately gain the extrinsic value of the option that someone chose to ex to exercise early and if someone's going to do that 21 days early that's a lot of extrinsic value that they gave up that you just gained on that trade so ed um me i i don't i hope that helped you know wrap your head around why you can sell and at the money put but there's no risk to selling an at the money put when you're using this type of rule what i i'm sorry there's no there's no risk of early assignment that's what i should have said what we've been doing is rolling losers until they eventually come back pretty much all blue chips do you consider this wrong compared to closing at 100 loss buying power is not an issue um we've been rolling losers until they eventually come back um i don't see a problem with that you know the question is just are you rolling losers just to prevent yourself from losing or are you losing are you rolling a loser because you actually think that that stock is bullish you know those are two different things right so if you're no longer bullish on a stock why are you rolling it and continue to take on downside risk because every time you roll it you're still taking on more risk uh joe so i would ask yourself you know if you weren't already in a losing trade would you establish a new credit spread on that stock if the answer is no then you should not be rolling it only if you said to yourself if i wasn't already in a losing position i would certainly establish another credit spread right now then it makes sense to roll right because that tells me that you're bullish on that stock but if you're just rolling four or five months in a row because stock keeps moving down and you don't want to lose that's a poor reason in my opinion to roll it only if and and this is this is this is where this trading psychology part comes you know a lot of investors just don't want to take a loss and i and i understand why you don't want to take a loss right no one wants to take a loss but it's sometimes better just to accept the fact that you were wrong on a trade and move on to the next one then continuously take on more and more losers until you kind of get yourself back to break even that's my view on that you end up spending a lot of months toiling over a losing position hoping to get yourself back to break even when you could be spending that time finding new stocks that you're actually going to be profitable on or excited about at trading as opposed to constantly trying to roll these losers so that's my view that's why i don't roll my losers that's why i don't hang on to losers because i'm just better off spending my time looking for new opportunities and someone just asked what's my view of repairing a trade that's the same thought you know ask yourself if i wasn't already in a losing trade would i be establishing a brand new credit spread on this particular stock again so let's say let's say i sold the credit spread here on xle right here i'm going to bring up a chart here of xle because xlu just made a big move here today um whoops let's say i sold the credit spread here on xle let's say i sold the 49 46 credit spread right let's say i did that and because i think xle is going to bounce higher but let's say two months a few weeks later xle is back down to 44. so you can say here to yourself okay let me roll it down to the 44 40 credit spread again uh you know because i've lost money on that trade i want to get myself back to break even well the question you should ask yourself is if i wasn't already in a losing trade would i be establishing a brand new credit spread here right now if the answer is yes if you're saying okay you know i think it's near a support level it makes sense i was put i would put on a credit spread right here then go ahead right but if let's say your views are now completely changed because before you were thinking that xle's still in this bullish trend and it's simply going to continue moving higher and now it's all the way down here and clearly this bullish trend is no longer intact and it's actually starting to turn lower why are you selling a credit spread on a stock that you think could continue moving lower there's no reason for that you're just throwing good money after bad money so that's my view of repairing a trade nothing wrong with repairing a trade but remove yourself from the losing trade first and ask yourself would i be establishing a brand new position on this particular stock that's bullish that's still bullish on a stack that's clearly perhaps no longer bullish so remove yourself from that first trade and then ask yourself that question what is the optimal pop you look for in a trade there isn't my opinion an optimal pop the optimal strategy is the one where you maximize the income right the more you can maximize the income the less risk you take so the more income that you collect the less risk you take and actually the higher the income the lower the pop i actually see credit spreads that generally have lower pops because the lower the pop the less frequent that i have to be pro be right in order to be profitable the ones with really high pops are the ones that require you to be right 95 of the time just to break even i don't want to be i don't want to have to be right 95 of the time just to break even that's impossible um you know in the long run it's possible to do that in the short run but it's impossible in the long run so that's why i actually choose credit spreads with lower pop but that's just the factor of the fact that i'm selecting credit spreads with very high income that have lower risk why is it sometimes hard to get filled on selling some verticals or iron condors widespread low open interest for example i tried to sell a fedex iron condor before earnings but even though my offer was the same as the mark i couldn't get filled well crystal there's your problem if your offer is the mark then i don't expect that you would get filled because the mark is effectively fair value you have to give the market maker something right that's like saying you know i it's like it's like walking onto a car dealership and saying i know you got the car for 25 000 but i want to offer you exactly 25 000 for it no car dealership is gonna sell you a car for twenty five thousand dollars if they bought it for twenty five thousand dollars so you have to offer them something twenty five thousand one hundred dollars twenty five thousand two hundred dollars twenty five thousand three hundred dollars work your way out right fedex is a pretty widely traded name liquidity is not an issue especially for trading a spread like an iron condor the net delta on it is relatively low market makers are not going to have a problem getting hedging that risk so it's really about offering something better than the mark the mark is the fair value so if you offer some someone fair value don't be surprised that they don't fill your trade uh tony can you clarify is the higher gamma risk for non-45 day only when they're shorter than 45 days so dean gamma risk is risk gamma risk accelerates as you get closer to expiration um i'm going to try to bring this up here give me one second i i'll try to show you um i'm trying to see if i can get you guys to show you what a gamma risk looks like so i'm just trying to set up my platform right now for this but it's taken a bit of time so i maybe i will set up a separate video on this just to show you what gamma risk looks like but to some degree here let me let me see if i can show you this um maybe it's easier just to show one leg instead of this vertical leg the platform does not like to uh not working okay here we go so this is the gamma risk as you get closer and closer to expiration well these are false steps i want day steps plus four days so as you can see as this put option this this is a short put and as i get closer and closer to expiration notice how the the colored lines as you go further down the colored lines uh the higher the gamma risk becomes um this oh sorry this is p l open let me show you gamma so as you notice how as i get further down as i get closer and closer to expiration the gamma risk of my short put gets higher and higher especially around the 120 because i so this is so this is selling a 120 put on arc and as i get closer and closer to expiration notice how extreme the gamma risk gets basically my p l will either go from my gamma either goes from very zero to very very negative to back to zero very very quickly and the closer i get to expiration the more extreme this gamma risk gets so this is and gamma risk just accelerates as you get closer and closer to expiration so what we're trying to figure out is you know this is your theta on the other hand theta as you get closer and closer expiration theta also accelerates here to the upside so the question is just at what point does the gamma risk acceleration outweigh the theta risk risk that you have as you get closer to expiration and that tradeoff happens around 14 to 21 days so that's why we roll these credit spreads 21 days from expiration is because what we're doing is while we're trying to maximize theta we're trying to minimize gamma and we're trying to figure out that trade-off between the two and 21 days happens to be that trade-off uh will you be adding that report to the tsx platform so julie yes we are actually talking to tmx about adding that credit spread report for canada what is your best time to trade the strategy you know in the days of electronic market making i don't believe there's ever a good or bad time to trade as long as you avoid the first i would say 10 seconds of opening and maybe the last 10 seconds before closing there really isn't a bad time to trade can you do an oco for debit spreads also yes you can trade oh you can trade these uh bracket orders for all types of spreads on thinkorswim glenn is saying seems like setting the short strike so close to at the money would be risky considering the current volatility could you hit the 100 loss in just two bad days no glenn that's not how this works um you know even in two bad days because you have the long leg that's going to also expand in an implied volatility that's going to offset the losses on the short leg so no that's not the case and again you know a lot of investors you know are concerned about selling these at the money puts right but when you sell at the money puts that's how that's how i'm able to get as much income as possible that buffers a move to the downside when you sell those out of the money puts you have almost no buffer so you're far more likely to lose much much more on two bad days when you sell something with low income that's far out of the money than selling something that's at the money that gives you a much much larger buffer and less losses so in a bad in it's not about how much you have to gain or lose it's how much the risk for reward is balanced so every time i'm winning i'm winning substantially more and every time i'm losing i'm not risking much more than what i'm collecting so for those of you and i've heard it seems like there's a lot of comments so far about people concerned about selling these at the money strikes it seems like you're you much more prefer selling far out of the money strikes well you can do that i'm not saying you can't right but when you sell these really far out of the money's credit spreads you have very little buffer you have very little income to show for and if the trade starts to go south you're risking far more than what you have to make on this trade that doesn't work out for you in the long run so all you you have two bad days it's gonna wipe out months of work and for me two bad days in the markets wipes out a week two weeks of work so that's why you want to sell these at the money credit spreads not these far out of the money credit spreads what value represents high vol generally speaking i would say an iv rank above 30 would be considered high vol a general question about vertical spreads is fundamentals sales and earnings growth important it seems with vertical spreads we only pay attention to the liquidity and directional bias not fundamental is that correct so wei hung i mean for those of you that watch me on cnbc you see that every single trade that i take there's no there's no trade that i take where i do not look at fundamentals fundamentals is core to every single trade that i make meaning if i'm going to be long a stock it has to be a stock that i at least understand the fundamentals of and believe that the fundamentals are relatively strong and vice versa if i'm short a credit spread or i'm sorry if i'm short a stock through a credit spread i always have a fundamental reason that i don't that i believe that the valuations are too rich or the stock is not growing as fast as the market is expecting it to there's all at least for me there's always a fundamental aspect to it that's not to say everyone does but for me i do and that's for those of you that join me for my rapid fire sessions you'll see that almost every single trade idea that i look at we don't just look at technicals we always look at at least understanding fundamentally what the company does and how their revenues and earnings have been growing tony most of the credit spreads in your report don't exceed a rating of 80 to 85 or correct you recommending 95 score on your site jake i don't think i've ever recommended that you only take trades of 95 or more on your site i certainly have never said that um there's no reason that you can't sell a credit spread with an 80 to 85 score 80 to 85 just means that you have you know a fairly balanced risk to reward ratio since it changes it every hour what if you take a trade and later in the day does not show up anymore it just means that it's no longer meaning that trade no longer provides any edge it doesn't mean that when you exit when you the only thing that matters is what the edge was when you entered this trade so if you enter it when it was four dollars and now it's three dollars and 33 cents and there's no more edge you were able to capture that 67 cents an edge and just because it's not on the report just means that that edge no longer exist but if you traded it you captured that edge stefan you know question about gamma versus time decay i hope i just explained that to you what formula should one follow to take profit for calls calls plus calls puts and spreads so aj i have a whole video on that you can follow us on youtube i'll post the link to our youtube channel here i do have one just on debit spreads and calls and puts so you can click on that link in the chat window and find that video where i do talk about the rules for managing long calls and puts on the on where on the site do i find the option settings the deltas on it uh you just click on modify of any so let's say i'm looking at the twitter may 65 calls you click on modify and on the drop down menu you have the strike price you have the premium and you have the delta next to it is oco supported by ib for credit spreads great question you know i i pretty much had everyone reach out to me uh after i posted that oco order asking the straw support this is tastyworks support this i was surprised to find out most brokers do not support this i have not found out from ib yet so if you could find out from your broker just ask them can i put an oco order on a spread they'll usually tell you yes or no i'd love to hear back from you and you can post that into the comments of that video the oco order video just let me know what broker you currently trade at whether they support ocos or not i think a lot of investors would love to hear that from from from investors to see which brokerage firms do support that order type uh hi tony in canada we can't trade credit spreads in a registered account this is similar to roth ira in the u.s um that's not true because i trade credit spreads in my ira account in the u.s so that's not the problem um you know i don't know about canada so i i'm pretty sure you cannot trade a credit spread on the tfsa registered account so you're going to have to trade these in a non-registered account or a non-taxable or a taxable account rather is volume versus open interest not volume not relevant not really so volume and open interest is only relevant when you look at the whole chain if you look at the volume of an open interest of an individual strike there are thousands of strikes you know what are what are the chances someone's happening to trade the same strikes that you are that's not always the case especially for something that's just listed right um dhi that uh that option's been only listed for a week so open interest and volume is going to be low on something that was just listed a week ago so open interest and volume and not a problem especially on the names that we are suggesting right so if you look at dhi dhi yesterday traded 4.9 4.1 million shares if you're trying to trade your 1 lot 2 lot 10 lot 50 lot 4.9 million shares is more than enough for any market maker to hedge your 10 20 30 option contract trade do not worry about liquidity for the most part open interest and plus open interest and volume are not good indicators of liquidity the bid ask spread is what you want to use to gauge liquidity so 560 585 that's a you know very tight spread here for something that's five dollars wide so that's why i'm not concerned about liquidity on dhi when rolling a credit spread to another month is there a debit level that would not make sense to roll um first of all a credit spread to another month should be a credit not a debit um but you know you really shouldn't be trading a credit spread roll at a debit i don't know why you would do that because that just means that you're throwing effectively what is good money after bad money what's the risk of closing one leg at a time instead of entering the entire spread the risk is that you don't get filled on the other leg and you have you have a completely different trade than you intended uh i do know that tasty tastyworks does not support ocos on credit spreads does the statistics for probability and risk reward work best more reliable if you mechanically follow exits to the letter yes i mean generally speaking any trading strategy works best when you follow the mechanics to a letter i i don't know any strategy that works better when you don't follow the rules can you place a limit short stock position instead of a long put as a protection can you place a limit short stock position instead of a long put as protection you can james um you can be short and long the stock at the same time but i don't know why you would ever do that because you would have to pay margin on the short stock position you know why not just sell the long stock rather than establishing a short position do you plan to offer a court a class about managing debit spreads um chuck uh we already have videos on managing debit spreads on our youtube channel so i posted that link into the chat window i recommend that you take a look are there rules for rolling the credit spread other than the 21 days um yeah there are three rules take profit at fifty percent max gain stop loss at a hundred percent of max gain and rule take out at 21 days to expiration whichever one of these three triggers first that is your trigger to get out of the trade uh julie like i said tastyworks does not support oco on spreads uh tanmay tony thanks for doing this i appreciate this is the strategy also applicable to trading ndx options as far as the strikes expiration dates and credit goes yes tanmay i don't think generally speaking you'll be able to find these types of very optimal credit spreads on trading the indices the indices typically have a different characteristic so you're collecting less income for it but you also have less single stock risk right you know index is not going to jump down 10 percent because earnings were bad so that's why on index options index options also have a benefit of of tax benefits uh index options also have a benefit of the fact that they're cash settled and there are no early assignment so for those reasons you're going to collect less premium i'm actually going to be doing some nasdaq ndx related videos soon so look forward to that in the next couple of months where i'm going to be doing more index options related content to the same rules do you apply the same rules regarding when to close trades for simple calls and puts simple calls and puts are easy you cut losses at 50 take profits at about 75 to 100 also again i have videos on my youtube channel that you can look at for those strategies can you explain why and how gamma expands in the last 21 days to expiration um bill i can but it's it's a little bit more complicated than you know you have to have a better understanding of basic calculus and derivatives to get into that kind of math um but you know hopefully at least you can watch the recording that i just showed that just gives you a sense that gamma risk accelerates as you get closer to expiration uh ken send us an email at info optionsupply.com and we'll take a look at your account for you ken about missing the emails similar to 21 days to expiration what would you suggest for a weekly trade i'm not sure what you mean by what would i suggest for a weekly trade you don't mind clarifying sanjeev should the stop loss be at six rather than eight since the max gain is at four no max gain is at f4 you want to take loss at 100 of the max gain so four plus four is eight 100 of the max gain of the max gain how do i make sure to get the link to the tuesday and friday sessions um maura you can also send me an email at info optionsplay.com and we'll take a look at that that for you and see if you know why you're maybe not getting it uh gary if if the stocks if the stocks at the support if the stock is at the support i sell the put to open will be a better chance to make money since i don't have to spend the money to buy the lower put if i get assigned i can also sell the cover call the risk is to buy the stock will that be a good way to make money so gary if you don't mind putting up all the cash to sell a put and you don't mind owning the stock sure by all means sell the put you also have unlimited downside though so as long as you're comfortable with that there's nothing wrong with that strategy i sell puts all the time on stocks that i want to buy is there a way to set up the software to default to credit spreads joe that is something that we're currently working on right now i sent the email previously still not rectified please look into it okay ken send it to me right and send it right now and i'll take a look at it after uh mark is saying in the daily dhi put with the by the 80 strike cell the 86 and a half strike and notice the target price was 101.115 if you held dhi until until it reached 101.115 wouldn't you get assigned no because the two puts would have expired worthless you would not be assigned as long as dhi stays above 86 and a half at expiration you will not get assigned because these are puts not calls the results of credit spreads men you show only one expiration date why so because you're only selling the credit spread on one expiration date both legs are on the same expiration date how do we see the spreadsheet the spreadsheet is click on the link at the bottom of your options play platform where it says credit spreads um irena if you don't mind sending me an email separately at info optionsplay.com regarding your question on thinkorswim for those of you that have not entered dhi if you have not entered it yet i don't know that you necessarily want to enter right now um we've had a big move here to the downside i still believe this 82 level as a strong breakout level but i don't know that if you missed out on this that it's still a good time to get into the trade in my opinion uh with a 100 max loss on a credit spread on what on average what delta does that equate to on the short strike uh i'm not trying to understand your question arthur um i don't i don't know what you mean by that is there a situation where diagonal credit spreads make sense comply with your rules um i also don't know what a diagonal credit spread is diagonals are by default a debit spread because you're buying a longer dated option that's going to cost you more than the short dated options that you sell so you can't sell a diagonal for a credit high volatility tomorrow triple witching friday ken the data clearly shows triple witching hour quadruple witching hour volatility is actually statistically slightly less on those days than on non-unregular expiration dates why not sell an in-the-money put if it's deep in the money and not holding to expiration because deep in the money puts a very little extrinsic value there's no point in selling something if you're not collecting extrinsic value that's why we sell at the money at the monies have the most extrinsic value that's what you're trying to capture here when you're selling an option so that's why you want to sell those at the money options that have elevated extrinsic value that's really what we're searching for when we say uh finding a credit spread with a optimal when we search for these these are the ones where the at the money strike prices have very high extrinsic value that's what we're trying to capture here what we're trying to find is the difference between at the money strike prices that have very high extrinsic value and then paying fairly little for those out of the money options to offset our risk whenever that skew is in our favor that's when we have something that has these 43 42 40 premium of the width collections that's how it works uh lori what indicators do you have on your charts i'm actually i'm actually going to be doing a video soon on this um but it's basically an rsi and a check and money flow and two simple moving averages very simple charts i don't like to keep mine i don't like to over complicate my charts if the position is at 100 loss why wouldn't it be held until or closer expiration hopes it might gain some profit back so just to clarify again this is not 100 of the max loss this is 100 of the max gain so you're not at max loss yet this this would have to expand to 10 to get to max loss so i'm i'm basically saving myself from losing another two dollars in this particular case so it's not 100 max loss it's 100 of max gain two different things um okay i've tried to answer as many questions as possible but i am at the end of my time i just want to again say thank you so much to everyone for supporting us and allowing us to continue to do to continue doing this i really hope that this was helpful in giving you a better understanding of these strategies why we seek these very specific strike prices and expiration dates on these types of strategies and at the same time help you understand if you chose something different what your risks are and what you can expect so with that thank you so much i hope you have a great trading day and again for those of you that are currently on a free trial to support us you can sign up by clicking on the link here on your screen which is trade.optionsplay.com member membership will allow you to access member only content like tomorrow morning in our market outlook session we'll address the sell-off we saw here today how that affects our directional view in the markets so i hope to see you guys here tomorrow morning for that for all of our members thank you so much have a great trading day and i'll see you guys here bright and early tomorrow morning

Channel: OptionsPlay

Views: 127,433

Rating: 4.8665357 out of 5

Keywords: options trading, options education, OptionsPlay, Tony Zhang, technical analysis, trading, trading education, CNBC

Id: BPVGBJhYjX0

Length: 86min 17sec (5177 seconds)

Published: Thu Mar 18 2021