People talk about how they make a lot of money in the stock market by buying a great stock at a low price.
But when others say they are making money buying and selling stocks randomly without an edge, I tend to get skeptical.
And a majority of traders don’t have a real edge in the markets…but instead treat the markets like a casino.
I know that’s not how I want to trade my money that my family depends on.
So instead, I created a credit strategy that mimicked the odds of a casino with the returns of a bank lending money.
And this way, I put the odds of winning in my favor to generate steady and consistent returns like I would do any rental property business.
Options Profit Planner
When you trade a stock you only have 2 choices: buy or sell a stock.
And the results are fairly binary, you either win or lose.
But what if I told you that by using options, you can actually gain an additional way to profit… and that is when a stock goes sideways.
And when you place this trade, you are paid upfront to take the risk.
But how do I do this?
I turned to credit strategies that specifically target the movement I think the stock is going to take and put me in a position where I make money if a stock goes up, down, or sideways.*
So what are these strategies?
- Credit Put Spreads
- Credit Call Spreads
- Credit Puts
- Covered Calls
And for me, I found that I need to be selling credit spreads that generate income for my trading business*.
I knew that casinos and successful traders have a well-defined edge in the markets, and I knew that I needed to find the same thing for myself.
So let me ask you these three questions:
- Do you like to generate income for your business?
- Do you want to own a business with the odds of success the same as the casinos?
- Do you need to work part time and want to earn full time returns?
If you said yes to any of these questions, then trading weekly credit spreads is the strategy that you need to start to leverage for your trading business.
Credit Spreads involve selling a high-premium option while purchasing a low-premium option in the same class or of the same security, resulting in a credit to the trader’s account.
While most options traders are focused on debit spreads, this strategy gives traders a unique advantage when trading credit spreads.
Credit Spreads
Credit spread strategies make you money while debit spread strategies cost you money.
And when you are a business owner, you want money coming in every month consistently.
A credit spread involves selling a high-premium option while purchasing a low-premium option in the same stock and option type.
A debit spread involves purchasing a high-premium option while selling a low-premium option in the same stock and option type.
There are 4 types of credit strategies, with 2 single-legged and 2 multi-legged options.
The two multi-legged options are:
- Credit Call Spread
- Credit Put Spread
So if you want to short the market without selling stocks or buying puts, you should trade the Credit Call Spread trading strategy.
The Credit Call Spread (or Bear Call Spread) is a bearish to neutral options trading strategy.
It aims to capitalize on both downward price movement of the asset and theta decay.
Credit call spreads work extremely well in both directional and sideways markets as the options will expire worthless at the end of the trade, leaving the premium for the trader to collect on.
What does that mean exactly?
It means that you receive the cash upfront!
That’s right, you get paid to take that trade!
Another huge benefit of this trade is that it has a lower max loss compared to selling calls and even purchasing put options.
As a seller of options, we can still make money even in a sideways market!
This is such a great strategy since it allows me to trade a short call and have a max loss on the trade.
A credit spread like this is a must to capitalize on premium decay … and this strategy helps to reduce the impact of implied volatility and incorrect market direction on a trade.
Now let’s take a closer look at the details of using this strategy and what to expect from it.
Credit Call Spreads – The Details
Remember , the goal is to profit from a neutral to bearish price action in the underlying stock while minimizing the impact of volatility and time decay.
What is this strategy made up of?
This strategy consists of one short call with a lower strike and one long call with a higher strike.
Let’s review the max profits, max losses, and breakeven of these trade strategies.
Max Profit
The bear call spread is a net credit received, and you will get paid upfront to take this trade. If the stock closes below your lower strike, you will be able to keep your entire credit received.
The potential profit is limited to the net premium received from placing the trade.
Max Profit = Net credit received
Max Risk
The maximum risk on this trade is limited, unlike naked calls, or short stock.
The maximum risk is calculated as the difference between strike price minus the net credit received.
Max Risk = strike higher – strike lower – net credit received
The maximum risk is realized if the stock price expires at or above the long call at expiration.
Breakeven
Like trading most trading strategies, there’s a breakeven that a trader needs to consider on this trade.
Breakeven = strike price -the short call + net credit received
Now that you know these three basic calculations, let’s take a look at some of the factors that impact this strategy.
Additional Factors of Credit Call Spreads
As a reminder…
The bear call spreads is a strategy that collects option premium and limits risk at the same time.
Both a short call and a short call spread profit from both time decay and falling stock prices.
A bear call spread is the strategy of choice when the forecast is for neutral to falling prices and there is a desire to limit risk.
And unlike stock, you can actually make money if a stock goes against you as well.
Impact of stock change
Bear call spreads benefits when the underlying price falls and is hurt when it rises.
This means that the position has a net negative delta for the trader.
Delta estimates how much an option price will change as the stock price changes, and the change in option price is generally less than dollar-for-dollar with the change in stock price.
Also, because a bear call spread consists of one short call and one long call, the net delta changes very little as the stock price changes and time to expiration is unchanged.
In the language of options, this is a “near-zero gamma.”
Gamma estimates how much the delta of a position changes as the stock price changes.
Impact of volatility change
Volatility is a measure of how much a stock price fluctuates in percentage terms, and volatility is a factor in option prices.
As volatility rises, option prices tend to rise if other factors such as stock price and time to expiration remain constant.
Since a bear call spread consists of one short call and one long call, the price of a bear call spread changes very little when volatility changes and other factors remain constant.
In the language of options, this is a “near-zero vega.”
Vega estimates how much an option price changes as the level of volatility changes and other factors are unchanged.
Impact of time change
The time value portion of an option’s total price decreases as expiration approaches. This is known as time erosion.
Since a bear call spread consists of one short call and one long call, the sensitivity to time erosion depends on the relationship of the stock price to the strike prices of the spread.
If the stock price is “close to” or below the strike price of the short call (lower strike price), then the price of the bear call spread decreases (and makes money) with the passing of time.
This happens because the short call is closest to the money and erodes faster than the long call.
But… if the stock price is “close to” or above the strike price of the long call (higher strike price), then the price of the bear call spread increases (and loses money) with passing time.
This happens because the long call is now closer to the money and erodes faster than the short call.
If the stock price is half-way between the strike prices, then time erosion has little effect on the price of a bear call spread, because both the short call and the long call erode at approximately the same rate.
Final Thoughts
Option sellers take maximum advantage of a nuance of options called time decay, or better known as Theta Decay.
What is Theta Decay? Well, OTM options lose value quickly and become worthless at expiration due to the impact of Theta.
And by selling options, this allows traders to not have to worry about correctly predicting the market direction or timing the market perfectly to generate income.
Option sellers can take advantage and be the house with odds in our favor on every trade
There are many ways to make money in this market and selling options is one of my absolute favorite go-to strategies.
Key Points:
- Credit Call Spreads profit if the stock goes down, stays the same, or goes up
- Limited risk vs naked calls
- Puts the house odds in your favor
- Allows you to get paid to take risk on a trade
If this sounds like a strategy you want to get working for your business.
Click here to learn more by signing up for Options Profit Planner today.
*Results presented are not typical and may vary from person to person. Please see our Testimonials Disclaimer here: https://ragingbull.com/disclaimer
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