Here are some important things to know if you’re looking to trade credit spreads for a living. 1. You need a large trading account with at least $10,000, but ideally more than $25,000. 2. Several trades need to be active. 3. Look to take profits around 50%. 4. Keep losses small and cut them quickly. 5. Rolling a credit spread is great way to limit losses and even turn losing trades into winners.
Trading Credit Spreads for a Living & How to Get Started
- Trading credit spreads for a living are cheaper to execute than naked calls and puts. You’re spending a lot less which can minimize loss if the trade goes against you. What is a credit spread? It’s a strategy where you buy one option and sell another with the same expiration date but different strike prices. It has to be done with the same stock.
Did you know that trading credit spreads for a living is a way to generate income while minimizing risk? Options trading allows you to make money in any market.
It doesn’t matter if the market is trading up, down or sideways. There is an options trading strategy to make money. Hence the popularity of options.
Options give you the right but not the obligation to buy (call) or sell (put) a stock at a specified price. Read our post on put and call options explained.
One options contract controls 100 shares of a stock. As a result, trading options is cheaper. However, options have more moving parts than a stock. These moving parts affect the price of a stock much more than trading shares.
This can be both good and bad. You can have a bigger return on your investment but also lose a lot more. So if you’re trading options, trading credit spreads for a living allows you to do trade a strategy that minimizes your risk.
Credit: Trading Credit Spreads for a Living
You can’t buy one option for one stock and sell an option for another stock. That just becomes buying and selling naked calls and/or puts.
With a credit spread, the money in credited to your account at the start of the trade. This strategy was designed to make a profit when the spreads between the two options narrows. Credit spreads can be bullish or bearish. As a result, you need to make sure you choose the correct direction when you’re trading credit spreads for a living.
The Pros and Cons
Trading credit spreads for a living may limit risk. Although, the trade off is the limiting or profit potential. However, if this is how you generate income, the limited risk is better for you.
Sure a naked call or put has the possibility for unlimited profit. However, the risk of a bad loss is real. As a result of having many moving parts to options, things like time decay, intrinsic value and implied volatility can impact how much you make or lose. Read our post on the implied volatility formula and its meaning.
Spreads cap loss if the stock moves dramatically in the opposite direction. We all know the stock market moves off of emotions. Any news, whether good or bad, will move the market or a stock.
There’s never going to be perfect market conditions for trading. In fact, the ability to minimize risk is more important than trying to hit a home run on every trade.
If you’ve looked at the charts and see a clear chance to make a large profit by placing a naked options trade, then take that risk. If you’re relying on your trading profits to make a living, then take the safer way.
Sure your profit potential is limited but you can still make a few hundred dollars a trade without putting up a lot of money.
Again, if trading credit spreads for a living is your income, the limited risk is ideal. In fact, you’re able to discuss this in our trading room.
The Types of Credit Spreads
There are different types of credit spreads. The credit spread also known as a vertical spread. A credit put spread also known as a bull put spread. The credit call spread is also known as a bear call spread.
A credit spread or vertical spread is simultaneously buying and selling calls or puts with different strike prices. A bull put spread is a bullish position where you make more money on the short put.
A bull put spread is best used when the market consolidates or the stock you want to trade is rising. In essence, you can use this strategy for two different occasions
A bear call spread is a bearish position where the money comes from the short call. You use this position when you believe the market or stock is hitting its peak.
Make sure you practice trading these spreads before using real money. You want to see how they work and if you’re using them correctly with the way the markets and stocks are moving.
Our service is a great place to come in order to learn more about trading credit spreads for a living.
The Goal of Trading Credit Spreads for a Living
Trading credit spreads for a living means your goal is to get a net credit. This is your income and you can’t make any more money than that. The way you get a credit is by the premium you pay for when you purchase the option is lower than the premium you pay for the option you sell.
To keep your entire credit you want the spread you’re selling to expire worthless. However nothing is ever perfect. If you have a good profit then it might be a good thing to go ahead and take it. You never go broke taking profit.