If You Must Trade Credit Spreads, Here's An Adjustment For You
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When used alone, credit spreads are very directional and embed a lot of risk into a trade. I'm not a big fan of credit spreads. While credit spreads have a high probability mathematically, they are also usually stressful as they are very risky. However, even though this type of trade is high risk, many option traders in the world continue to use them. So in this article I want to explain a simple adjustment you can apply to this strategy in order to lock in profits when it does, in fact, work out as planned. A Credit Spread Adjustment by San Jose Options If you enter into a credit spread and the market quickly goes the right direction and your trade is up 5%, you might immediately exit this trade to capture the profit. In this case you make a quick gain and think you've done well, but there's an adjustment you can apply to lock in your profits and stay in the trade even longer. You simply add a debit spread to the existing credit spread to neutralize the Delta, lock in your profits, and position yourself to make money if the underlying asset makes a U-turn in the opposite direction. Since the market nowadays often moves up and down, and up and down again so frequently, this simple adjustment strategy can work quite well. This is one of my favorite adjustment strategies for capturing profit on credit spreads for two reasons. One, it's very simple and straightforward and two, you can make even more profit when the market unexpectedly reverses. As an example of how easy this adjustment can be to make, let's say you're trading the RUT and your credit spread is a bull put spread at strikes 700 and 730. Well, as soon as you realize a profit, just buy a 760 and sell additional 730 contracts. This can end up looking just like an unbalanced butterfly where the number of debit spreads does not equal the number of credit spreads. This easy adjustment will usually give you a chance to lock in profits and continue the trade. Let me repeat that credit spreads are not my favorite type of trade, but if you like them, then it'll be worth your while to employ a couple of techniques that will lock in your profits. I hope you find these suggestions helpful. If you run with them and expand on this approach, you may well develop some powerfully effective adjustment strategies as an options trader.