HOW TO TRADE CREDIT SPREADS FOR INCOME
A great way to grow your brokerage account is trading credit spreads for income. It's one of the different options trading strategies at your disposal. Credit spreads teach you how to invest in the stock market with little money. In fact, the appeal of credit spreads is the limited risk because they're less expensive than naked calls and puts.
Options give you the right but not the obligation to buy and sell a stock at a specified price. One options contract controls 100 shares. As a result, you're paying much less to control 100 shares with an options contract than you would buying 100 shares outright.
However, options have more moving parts than stocks. This affects their return on investment both negatively and positively. Make sure you've learned options trading strategies for beginners before getting into spreads.
Trading credit spreads for income is a smart way to protect yourself. Trading options for a living in a crazy market can be scary. Things like time decay and implied volatility affects price. Read our post on the implied volatility formula and its meaning.
If you've made the correct trade, it can be really helpful in boosting your gains. However, if the trade goes against you, it can cause you to lose a lot of money. As a result. Trading credit spreads for income means you need to protect yourself.
Trading naked calls and puts is risky. Any news that affects your trade in a bad way can cause your options to expire worthless. In fact, did you know that 80% of options contracts traded expire worthless?
Under those circumstances, there's a bigger chance you could be apart of the 80% losing on an options trade. Hence the importance of study. Options do allow you to make money in any market condition.
Even when the market is trading sideways, there's a strategy to use to profit. It's just one of the many appeals of options trading.
If you're trading credit spreads for income, you should know what they are. The credit spread strategy is buying one contract and selling another contract on the same stock with the same expiration date but different strike prices.
You account receives a net credit, hence the name. You want the spreads to narrow to get the most profit.
Credit spreads can be bullish or bearish so picking the correct direction is important. A credit spread is best used for a moderate move. If you're expecting a large move in one direction than a single call or put might be the best option.
However, a spread will protect you from a big move in the wrong direction. Hence one the the benefits if you're trading credit spreads for income. The one draw back of a spread is the profit cap. It's one of the trade offs of limiting risk.
Spreads tend to be more of a longer term strategy. However, you may want to close out the trade when you've made a profit. You can't go broke taking your profits.
Take our options trading course to learn more about trading credit spreads for income.
Trading credit spreads for income still requires the correct direction whether bullish or bearish. This means you have to trade the patterns. However, you should be trading the patterns no matter what.
Pattern breakouts or breakdowns are the moves every trader wants to capitalize on. In order to do so you have to know what the patterns look like and what they mean.
You could see three outside down patterns on a chart and not realize it's what you're looking at. If you look a bullish position on that, you're going to be losing already.
There are big patterns like symmetrical triangle patterns. Inside those big patterns are medium sized ones like inverted cup and handle patterns.
If you zoom in even further you see the small 2 and 3 candlesticks patterns such as three inside down patterns or evening star patterns. If you don't know how to recognize these patterns, you're doing yourself a disservice.
Trading credit spreads for income without first practicing is taking a huge risk. Just like with any trading strategy, you need to practice trading credit spreads with paper money first. Not doing so can really hurt.
As a result, you're doing yourself and your brokerage account a disservice. Sure the risk and the capital you're putting up is minimal comparatively.
However, taking even small losses continuously is going to negatively affect your account. Trading is emotional. When you win, it's a high. When you lose, it shakes your confidence.
Practicing allows you to learn to control your emotions as well as learn patterns. The more your practice, the better trader you become.
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