The best stocks for weekly credit spreads don't need to be huge movers. In fact, it's better when the moves are moderate. Options trading is a popular way to trade the market.
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. Hence it's cheaper to buy and sell options contracts.
However, options have more moving parts than stock trading does. This makes them more risky. The need to study options is very important.
Learn how to use the different parts to your advantage. For example, time decay, intrinsic value, open interest and implied volatility. Read our post on the implied volatility formula and its meaning.
When you think of options trading strategies for beginners, everyone starts off with calls and puts. Calls are the bullish option and puts are the bearish option. Read our post on put and call options explained.
Trading naked calls and puts, while lucrative, are extremely risky. Markets can change in an instance with news. The market is a battle between buyers and sellers in and of itself.
That battle can and will have an impact on your options contracts. In fact, this is why credit spreads are a popular strategy when people begin to learn stock trading along with options. Vertical spreads in general are popular.
The reason for this is the spreads ability to limit risk. When you're trading options for a living don't you want to limit your risk? There's nothing worse than watching your profit turn to loss quickly.
If you've ever traded naked calls and puts, you've seen it happen a lot. Instead of that happening, you look for the best stocks for weekly credit spreads.
To better understand the best stocks for weekly credit spreads, we first need to know what credit spreads are. A credit spread is the purchase of a call and the sale of a put on the same stock, with the same expiration but different strike prices.
You get a net credit when you place the trade. Hence the name credit spread. The way you profit from this strategy is by the narrowing of the spreads between the two options.
To break it down further, when you place the trade, you're given a credit. The narrowing of the spread means that the option you sell is in the money but the profit is still smaller than the credit you received at the start of the trade.
Why do options traders love spreads? The risk you take on is limited. Spreads are also cheaper so they are used to reduce the cost to place the trade. However, the drawback is that the profit is also limited.
The best stocks for weekly credit spreads are the stocks that have moderate moves. You still need to pick the correct direction but a $4 move will net you a profit as opposed to needing a much larger move to make money.
When trading weekly credit spreads, you need to look at the charts. You have to decide on a direction. Your spread can expire worthless if the wrong direction is chosen.
However, because the cost to trade a spread is reduced as opposed to a single call or put, the loss is more minimal. No one wants to make a losing trade though. That means you have to trade the patterns. Although, trading patterns doesn't mean winning trades every time.
There are bullish and bearish credit spread strategies. If charts are showing triple top patterns, then a bearish credit spread is a good bet. Bullish credit spreads are implemented when bullish patterns like cup and handle patterns or inverse head and shoulders patterns have breakouts.
Zoom into those larger patterns to see what the smaller two and three candlestick patterns are. Those small reversal patterns are just as important as the big ones as they can have an affect on the direction of a trade as well as profit and loss.
The best stocks for trading weekly credit spreads are stocks that have the ability to make moderate gains. Hence the importance of support and resistance.
Just like with any type of trading, you don't want to place a trade too close to either support or resistance. You need to have room to move in either direction depending on your strategy.
If you're bearish on a trade, then buying too close to support limits your chances. The opposite is also true. If bullish, then buying at or near resistance is going to have an effect on your gains.
There's no 100% guarantee in profiting when trading weekly credit spreads or any trading style in general. Any stock trading service that says you'll get rich following them, is lying. That's the harsh reality.
However, using technical analysis coupled with candlesticks and patterns help to give you a clear sense of direction. Trading weekly credit spreads needs to have the confirmation of a move. As a result, look at what the technical indicators are doing.
Where is price in regards to moving average lines? What does the RSI show? Do the candlestick patterns match up with what the technicals are showing? Again, that isn't 100% fool proof.
However, it gives a much clearer picture. Going into a trade with solid knowledge helps take the emotion out of trading. The reason for this is that you have direction, technical analysis confirmation and an idea of where the stock is headed.
Weekly credit spreads are the stocks that have moderate profit potential. Credit spreads are inexpensive to trade but do cap profit potential. However, they also cap potential risk. As a result, it's a great way to grow an account while protecting yourself. The correct direction must be taken because they can expire worthless. Take our options trading course to learn about trading options.
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