Option traders often have questions about credit spreads, and rightfully so. There are so many newsletters that pop in the inbox, and there are trade gurus, who claim some great things as far as returns are concerned. In this post, let’s talk about the basic aspects that eventually matter.
Know credit spreads better
Credit spreads are easy to understand at the core. Basically, a trader buys and sells more than one option with the same underlying or associated security but different strike prices. The profit is the difference of the amount you collect by selling and buying the options.
The basics of bullish strategies
In general, bullish strategies or spreads are used when the underlying stock prices are expected to rise. You will have to understand and comprehend the overall hike in stock prices and the time frame in which such changes will occur, so as to decide on a strategy. Some traders often set a target price and utilize the bull spreads to reduce the costs. It doesn’t reduce the risks, as the options can be worthless at expiration. However, you can maximize your profit with your moderately bullish options.
The basics of bearish strategies
Bearish strategies are just opposite of bullish strategies, where the trader expects the price of underlying stocks to do down. Again, you have to predict the actual fluctuations in stock prices and the time frame in which these downward trend will happen, which will help in finding the effective trading strategy. Bear spreads are used for reducing costs, and there is usually a cap on the maximum profit you can get from such strategies. The best example of moderately bearish strategies is a bear call spread.
Avoiding the mistakes
Many users make the mistake of opening the trade too close to the expiration time. This might not be a big mistake for traders who understand the risks. Another mistake that traders make is holding the trade till expiration, which increases the gamma risk. Also, some traders allocate too much capital to Iron condors.
Do your research and don’t believe everything that you see on the web. Some of the traders are just too good to be true, and there are considerable risks, and despite the loss, there are people who refuse to learn from their mistakes related to credit spreads. Read the right sources and do consider all the risks and other aspects before taking a call.
Author Bio: Kim Klaiman is a finance author with years of experience in trading. She works with many blogging sites as a guest writer on options.