Options Credit Spread Strategy for Weekly Income

hey everyone our deann here from axe options if you're a part of our room you know that we've been using an options trading strategy that has been successful 92 percent year-to-date that has a 200 plus percent return on our investment and continues to make our traders a weekly income so the credit spread it is an advanced trading strategy that we use at least three times a week on the ticker SPX and so I thought I'd make the following video to explain kind of in detail what the credit spread is and how it reaches its profit potential and hopefully you can master the strategy because this can be used for other tickers and in different time durations so if you have any questions let me know ok so let's just start by defining what a credit spread is a credit spread is an option strategy that consists of two legs you're selling an option and then you're buying another option with the same expiration date but further out of the money so there's two types of credit spreads a call credit spread which is also known as a bear call spread we are selling a call and then buying another call at a higher strike price but with the same expiration date and a put credit spread is the opposite and it's called a bull put spread so when you expect the stock to move lower you're buying a bear call spread and when you expect the stock to move higher you're putting on a put credit spread okay really quickly if you're a current member of our room these types of spreads are alerted in the zero dte trade channel okay so I've put up an example trade here and every trade will have two strike prices so you can see 2755 and then are further out of the money strike which is the 2750 every trade will have an expiration date which you can find in the middle of the options chain and since it's a put we're always going to be on the right-hand side of the options chain and then in thinkorswim you can see that they have put an icon next to which of the strikes you're selling and which are the ones you're buying so this example is a bull put spread and we would want SPX to move higher so the further away from the at-the-money strike which in this image is 28 10 the further away our strikes move from 28 10 the lesser the premium is worth and for our max gain we would like for it to be worth nothing okay so how do we profit let's do the math okay so in this screenshot selling the 2755 strike would give you a dollar 85 in credit and buying the twenty-seventh 50 strike would cost you a dollar 45 so the net credit on this spread would be 40 cents but we typically aim for at least 50 so going forward I'm just going to use use the example that we filled at 50 cents so for every one contract that controls 100 shares so the max game for every one spread would be at least $50 okay so let's calculate what the max loss is because this is also the margin requirement that your broker will require of you so SPX trades and $5 increments so you take the width of the strikes and you minus the credit you took in which was 50 cents and that leaves you with four dollars and fifty cents and of course you change that by a hundred so the margin requirement will be four hundred and fifty dollars for every one contract okay you might be asking yourself why would we take a trade where we are risking four hundred and fifty dollars to make 50 dollars and the answer is is it has a high probability of success and I can actually show you how high the probability is thinkorswim has a column which is cut off in my image but it's called probability out of the money and this spread has a ninety to ninety two percent likelihood of expiring out of the money which also means worthless which is our max gain okay so in addition to having a high probability of success this strategy also has a great return on your investment let's do the simple math where if we took in fifty dollars of profit for using four hundred and fifty dollars of our capital that's an 11 person return we typically do these in one trading day so to get an 11% return in one trading day is a pretty good okay let's talk about what happens if the stock does not move in our direction okay so this is the chart of the entire day's price action for SPX on the day that we traded that previous example so we entered the spread at probably 10 or 15 minutes after the bell and you can see on the right-hand side where the prices of SPX and that it was trading at about 28 10 since we put on a put spread we are bullish on SPX and all we need is for it to close above the higher of our two strikes so so long as svx closes above 2755 we will be at our max gain so if SPX were to move down during the day we would need to consider cutting the trade if it got near one of our strike prices so it's hard to make a blanket statement about where or when we would cut the trade because every day we're watching different indicators and watching new support and resistance levels as the stock trades throughout the day so generally we would consider a stop at two to three times the credit recede so if the premium reached a dollar or a dollar 50 we may have to consider cutting the tree okay something that I thought was worth mentioning here is the benefit of selling a spread versus buying a single collar put so if we had entered if we were still bullish on SPX and we had entered a call option for SPX at 28 10 SPX would have had to have move up for us to have made a single penny of profit but in the event of our spread SPX could have moved up which would have been in our favor it could have even traded sideways all day and it still would have been profitable for us and it could have even had a quite a significant move down just so long as it did not go below 27 55 and in all three of those circumstances we still would have profited us to recap here if at the beginning of the day you are bearish on the ticker you put a call credit spread and if you're bullish you put on a credit spread you want the spread to expire worthless which would be your max gain okay so for the past couple of months we've been just adjusting to our members that we closed the trade at 10 cents and I'll show you why if you look at the price action of the last hours worth of candles in this image you can see that it was wildly swinging 40 points up and down and had we been in a spread it would have severely challenged it doesn't even matter what side of SPX you were on a bull put spread or a bear call spread it would have challenged her position so it's just been our experience so far this year in 2020 that less time in the trade is better for our stress levels and it's just a way to mitigate our risk so we've been closing the orders at 10 cents so while there are pros to exiting the trade at 10 cents there's also some cons you will lose a day trade because you're making a round trip so you're buying and selling within the same day and you will be losing 10 dollars per contract and you'll also have to pay Commission on the closing order versus how'd you just like let it expire worthless you simply leave it alone in the broker takes care of closing out the trade in case you're wondering why if we are making a directional bet wouldn't we just sell the 2755 strike and keep the entire dollar 85 credit without buying the 2750 bet a dollar 45 and the answer is is the margin requirement because theoretically SPX could drop to zero right and the margin requirement would be 27 55 times 100 so putting on a naked put would have quite a bit of risk and on the opposite side if you were on the call side SPX could rise theoretically infinitely so the margin required would be extremely high so that's why we put on this second leg as sort of an insurance or hedge against the first call and doing so also defines our max gain and our max risk hey everyone so a couple more things that I just wanted to say about this strategy in closing is that we typically trade 0 days to expiration and credit spreads so we enter the trade pretty early in the morning and that's in order to capture the morning volatility right after the bell so it's important to be ready early in the morning to jump into this trade and capture those higher premiums the other thing that I wanted to say is that even though you've seen that this strategy has a very high percentage of success the losses if you let them go to max loss can be devastating they can wipe out several prior weeks of gains so as a trader it's important to know when to cut your losses also the goal here is small consistent wins over time consistency not huge winners so keep your contract sizing comfortable okay because if and when there comes a time when your position is going to be challenged this will immediately turn into a very high-stress trade and you might make a decision you wouldn't otherwise make had your contract size has been smaller so part of being a professional trader is knowing that nothing in the market is guaranteed and that there will be a time when you're going to have to make a tough decision about whether or not to cut a loss or to cut a trade so having losses are a part of this game you know so you have to learn to keep them small lose well and know that there's another trade around the corner also and lastly in case you were wondering why we put in a closed order for 10 cents and not 5 cents in my experience those 5 cent orders do fail but they often take an additional couple of hours and in this strategy sometimes especially towards the end of the day time equals brisk for their strategy so it's just been in my experience that a 10 cent order is easier to fill than a five cent closing one alright everyone thanks for watching if you have any questions please feel free to ask me thanks bye bye

Channel: Axe Options

Views: 68,944

Rating: 4.9118943 out of 5

Keywords: options, stock market, SPX, credit spread, trading, stocks

Id: 3VFQQ38BwmU

Length: 11min 25sec (685 seconds)

Published: Wed Apr 29 2020