The best stocks for weekly credit spreads are large-cap companies that are highly liquid. Look for options contracts with at least 1000 or more open interest and high daily volume. A tight bid/ask spread is important for entries and exits. Look for strike prices near the money to trade.
What Are Weekly Credit Spreads?
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. Look for a tight bid/ask spread, high open interest, and volume, and go 1-2 weeks out with expirations.
Stock options give you the right but not the obligation to buy and sell a stock at a specified price. One option contract controls 100 shares. Hence, it’s cheaper to buy and sell options contracts.
However, options have more moving parts than stock market trading does. This makes them riskier. 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.
Basics
When considering options trading strategies for beginners, everyone starts with calls and puts. Calls are the bullish option, and puts are the bearish option.
Trading naked calls and puts, while lucrative, is extremely risky. Markets can change in an instant 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. 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 spread’s ability to limit risk. Don’t you want to limit your risk when trading options for a living? There’s nothing worse than watching your profit turn into a 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.
What Is a Credit Spread?
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.
You’re given a credit when you place the trade to break it down further. 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 is limited. Spreads are also cheaper, so they are used to reduce the cost of placing the trade. However, the drawback is that the profit is also limited.
The best stocks for weekly credit spreads are those with moderate moves. You still need to pick the correct direction, but a $4 move will net you a profit instead of needing a much larger move to make money.
Trade the Patterns
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, the loss is minimal because the cost to trade a spread is reduced instead of a single call or put. No one wants to make a losing trade, though. That means you have to trade the patterns. However, trading patterns don’t mean winning trades every time.
There are bullish and bearish credit spread strategies. A bearish credit spread is a good bet if charts show triple-top patterns. Bullish credit spreads are implemented when bullish patterns, like a cup and handle pattern or an inverse head and shoulders pattern, have breakouts.
Zoom into those larger patterns to see the smaller two and three-candlestick patterns. Those small reversal patterns are just as important as the big ones, as they can affect the direction of a trade and profit and loss.
Are Credit Spreads Safe?
Are credit spreads safe? Yes, they are the safest options trading strategy. However, you need to know how to trade them. Being an options seller puts the trading odds in your favor over being an options buyer, but you can still lose if you don’t know how to trade them the right way.
Support and Resistance
The best stocks for trading weekly credit spreads are stocks that can make moderate gains. Hence, support and resistance are important.
Like any trading, you don’t want to place a trade too close to either support or resistance. Depending on your strategy, you need room to move in either direction,
If you’re bearish on a trade, buying too close to support limits your chances. The opposite is also true. If bullish, buying at or near resistance will affect your gains.
Final Thoughts: Weekly Credit Spreads
There’s no 100% profit guarantee 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 helps to give you a clear sense of direction. Trading weekly credit spreads needs confirmation of a move. As a result, look at what the technical indicators are doing.
Where is the price regarding 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% foolproof.
However, it gives a much clearer picture. Going into a trade with solid knowledge helps remove the emotion of trading. This is because you have direction, technical analysis confirmation, and an idea of where the stock is headed.
Weekly credit spreads are a great way to grow an account while protecting yourself. The correct direction must be taken because they can expire worthless.
