Weekly Options Credit Spread - The Foundation Of Consistent Option Income
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The Weekly Options credit spread is one of the more popular strategies among option traders. Along with being one of the easier option trading strategies to understand, another reason newer option traders in particular gravitate to this strategy is that it can require very little time to manage it while it is on. Another way to put it, is that credit spread sellers don't need to be glued to their computer screens all day watching every tick of the market in order to generate consistent income with this trade. The credit spread trade is a basic building block of many if not most other more complex option trading strategies such as the iron condor spread, the butterfly, and the double diagonal trade. For example, the butterfly is created using one credit spread and one debit spread, while the iron condor is made up from two credit spreads, one on either side of where the underlying is currently trading at. Traders like to sell these vertical spreads because when invested correctly the trades have a good probability of success and can allow the investor to still profit and 'win' without having to be exactly right with priced direction and movement. When sold correctly, credit spreads can bring the trader a good monthly return while the individual actually placing the trade could be incorrect with their belief and 'prediction' of where the stock market would be heading next. Let's create an imaginary trading scenario to illustrate. Imagine that a trader believes that a particular stock will be heading down in the short term. Because he is bearish on this stock, he sells a bearish credit spread called a bear call spread which benefits from bearish move. The only way this spread trade can lose money is if the stock winds up doing 1 out of 4 possible scenarios - giving our trader a three out of four likelihood of winning. If the stock moves down as our trader predicts he wins. If the stock stays stagnant and goes nowhere, he wins. In fact, even if the stock moves against our trader and heads upward he wins just so long as the underlying doesn't move so far as to breach the spread sold. The only our trader loses is if the underlying moves far enough upwards passing the option strike price that was sold - which if it does, our trader could still salvage the position through appropriate management and adjustment methods - adding up to yet another reason why option sellers love this strategy so much which is also called the Iron Condor .