The best stocks for credit spreads are the stocks that have the best potential moves. Credit spreads are one of many options trading strategies.
Options are a great way to trade in the stock market. They give you the right but not the obligation to buy or sell a stock at a specified price. One options contract controls 100 shares of a stock.
As a result, trading options is cheaper than trading stocks. Especially when you're trading the large cap stocks. However, options have more moving parts then a stock does.
There is time decay, intrinsic value and implied volatility to name a few. Read our post on the implied volatility formula and its meaning.
Before looking for the best stocks for credit spreads, you first want to make sure you've mastered the options trading strategies for beginners. One of the great things about options is the ability to make money in any market.
When the market is bullish, bearish or even trading sideways; there's always a strategy to make money. You can start with calls and puts. However, those alone can be risky. Read our post on put and call options explained.
As a result of the risk of naked calls and puts, other strategies are used. Credit spreads happen to be one of those. A credit spread is made up of two options contracts for the same stock.
You buy one contract and sell another with the same expiration date but different strike prices. There are bullish and bearish options for credit spreads.
The credit spread gets its name because money is credited to your account when you open the trade. The ability to profit works best as the two contracts begin to narrow as time passes.
Credit spreads are less expensive than buying calls and puts by themselves. They're also less risky. However they do cap profit potential. On the plus side, you know what you're risking and it usually isn't much.
Hence why the best stocks for credit spreads are the ones that make you a profit. Check out our trading service to learn more about the best stocks for credit spreads.
The best stocks for credit spreads still need to have a chosen direction. There are some strategies, like the iron condor, that make money in a range where now direction is necessary.
However, with credit spreads, you still need to have a bullish or bearish bias. This requires trading the patterns. If you decided you wanted to be bullish on a stock but it was breaking out of a rising wedge pattern, you'd be making the wrong trade.
Rising wedge patterns may sound bullish, however, they're not. The key to placing the right trade is to look at the charts. It's important to remember that not every trade will be successful.
Even doing everything right and following the patterns doesn't guarantee the trade won't go against you. Even the best traders fail 30-40% of the time.
The good thing about credit spreads is the substantially limited risk. If you've ever been in a trade, especially with options, that really goes against you, you know that you can lose quite a bit.
Hence the popularity of the credit spread strategy. As you know, news and emotions move markets. A dramatic fall or rise in price doesn't mean a dramatic loss.
Our trading room talks about the best stocks for credit spreads.
Everyone wants to find the stocks that are going to move; even with day trading options for income or using swing trading techniques. It can seem overwhelming to think about where you'd find stocks to trade spreads with.
You may have your go to stocks. However, it's smart to be able to find others if yours aren't moving much. You can subscribe to a service that sends out a watch list. You can use the scanners on your trading platform.
Trading platforms have scanners that you can customize to look for stocks that fit your trading style. Scanners like Market Club are great for options trading and swing trading.
Read our Market Club review. If it's affordable for you, it's always good to have tools like Market Club to find stocks about to break out.
The best stocks for credit spreads all depend on the strategy you're going for as well as market conditions. The best thing about trading spreads is that ability to make money in any market.
However, before using real money to trade credit spreads, or any type of options for that matter, practice. Make sure you have a paper trading account you can practice in.
This way you can see how trading credit spreads works and the best strategy to use in doing so.