Put Credit Spreads Explained
Вставка
- Опубліковано 5 сер 2024
- Put Credit Spreads Explained | Coffee With Markus | Episode 59
0:00 Introduction
1:50 Stock Market Recap
15:00 Put Credit Spreads Explained
33:30 Question and Answers
Trading a credit spread means you’re being credited for selling a put option contract. And at the same time, debited for buying a put option contract as protection. You keep the n
I like to contrast trading credit spreads with trading outright puts options.
Boeing just announced some big news about their 737 Max and traders are loving this stock right now!
Let’s say that you do NOT expect Boeing to move below its current strike price of $194. Because you are expecting Boeing stock to increase in price, you are going to sell a put at a strike price at $160.
By selling this put option you would be able to collect a premium AND you’ll be able to KEEP this premium if Boeing stays above $160.
In this particular example, we’re going to sell 160 Exp 8/21 put contracts. Our maximum reward for this credit is $800. Because I’m trading in a margin account in Tasty Trade, I’m only required to have $1,610 in margin.
It’s important to note that selling a put contract could have a potential max loss of $15,200. This means that if the stock price went to zero, you could theoretically lose $15,200.
You might be saying to yourself right now “that’s a lot of risk for only $800... “.
But, there is some good news. The probability of profit for this trade is 74%! That means that there is a 74% chance that Boeing will stay above $160 at contract expiration.
Why should you trade credit spreads?
This is a great question! Trading credit spreads can reduce the potential liability of your position. It can also greatly reduce the margin requirements for the trade. This means less risk for you, and more capital for other positions.
How is this possible?
We’ll let’s examine the put option contract we just purchased on Boeing. Selling this put option contract netted my account $800. But this position also required $1,610 in margin and had a potential risk of $15,200.
If we purchase an additional put option at the $155 strike price for the same expiration date, it will do several things. Purchasing an additional put option contract will reduce the margin requirement to only $370. It will also reduce your maximum risks to $500 dollars per contract. Purchasing a put option costs money so it will decrease the overall profitability of the trade. In this instance, purchasing the $155 put option costs $670. This will bring the net credit of this position down to $130.
Purchasing a put option will also raise the break-even point to $158.70 from $152.
This means that the trade is no longer profitable if the strike price moves below $158.70.
This brings me to my next point!
When to trade this strategy
You trade the put credit spread strategy when you are bullish on the underlying stock. If you believe the stock is increasing in price, a put credit spread is a higher probability position to take than a directional call.
An important thing to remember is that put credit spreads should ALWAYS be closed before expiration.
When a put option contract is sold and the strike price falls below the put option contract, you are at risk of assignment. If you are in a put credit spread and the put option you sold is in the money (ITM) you should close the position immediately.
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Very concise explanation and very enjoyable !
30:07 the fact that you mentioned the need to close the trade when every educator forgets that or doesn't do it, gives you a lot of credence. The danger of after hours volatility on the day of expiration, never gets talked about.
Hi C S, thanks for watching. And thanks for your feedback. Much appreciated. "See you" in the next video 👍
I agree. I'm just starting to study credit spreads. If I understand it correctly, if everything goes exactly right, both trades of the spread expire worthless and you keep the credit amount you received when you opened the position. However, if it's not going quite as planned and it's looking like the uncovered option you sold is going to go into the money before expiration, you risk it getting assigned. If you can't afford to cover that, you'll need to get out of it. I've also heard that if you close one or both of the trades, you forfeit your credit. I'm not sure. Correct me if I"m wrong.
@@gregflorko8402 what a shame no one could answer this
Incredibly helpful....Thank you Markus!!
😊 You are welcome! I am glad that this helps!
Hi Markus
Don't worry about my question. I just saw the remainder of ur excellent video and I think you already answered my questions. Thank you.
😊 You are welcome! I am glad that this helps!
I really do appreciate these videos...
Awesome! Thank you for watching! :)
Thanks Markus, very good explanation
I am glad this helps!
Great information!! Thank you
😊 You are welcome! I am glad that this helps!
Yes. Is useful. Thanks for The video 👍
Thank you!
You are as honest as people come!
Awesome! Thank you for watching! :)
i know this video was 3 years ago but i just started trading credit spreads with 20k and Im down about the same amount of cash. i was really questioning myself. thanks for the insight.
You are welcome! Would you be interested to learn how to trade smartly? Read this audiobook that Markus recently published rockwell.info/YTAudiobook
Love your videos Markus! I was reviewing vertical puts and looked up NKLA after you mentioned them, $13 now 🙈
Awesome! Thank you for watching! :)
I learned a lot.
Sorry for the previous question about the Tuesday night class being recorded and available in the members area for PXO owners. I just watched this video and am behind due to working 12 hour shift work and overtime so I'm trying to catch up on your videos. Thanks Markus!
Yes, it will be recorded, and YES, it will be in the Member's Section of the website under "PowerX Optimizer". We will also upload it into the Rockwell Trading App. 😀👍
I love this video...
May I ask..
What's the difference between , let's say, an AAPL credit spread... Strike prices 85-80 as compared to 85-60, in terms of volatility and risk?
Let's go Nikola!!!
Than you for watching! :)
Yes!!!!!!!!!!!!!!!!!!!
I have a question.. if you are selling a spread and you are ready to close before expiration, is there a chance that you won’t “ sell to close your” buy put” and or buy to close your “sell put’”? And if that’s the case what is the risk of your spread? Financial
Thanks
You are welcome!
Nice Video,
Thank you! See in our next live session today! ;) Here ua-cam.com/video/l6F9KjXgMeE/v-deo.html
Great.
😊 Thank you for watching!
I have recently used credit spread but only because I sold ITM 3 PUTS on GM @40 General Motors while trading at 37.50 collecting 3 x 2.50 = 750 (1 week expiry). Then Buying PUT @ 34 strike was cheap = 30 So I am still making 730 while I am protected from what I call MARKUSRIDE risk (GM dropping well below 34 = can not sale covered calls and stays). I do not do this often. Only when selling ITM at top of stock side cycle and current price is in the middle of cycle and buy put at the just slightly bellow resistance of cycle. Plus 750 credit versa 30 is cheap cost insurance ratio is worth.
Hi Markus new to selling puts, what do you think of GNUS $3 put for July 17 paying .80/contract and price is now 3.60? I bought a few at .85 after seeing a post on this trade when it was paying .90, got in at .85 what do you think? Tia!
is it safe to trade the strike price furthest itm?
Markus, 1) no one talks about the issue is that a few days after you sell a put the bid/ask for the same strike goes up sometimes substantially as it happened to me so if I had traded a credit spread, my trade price to close the spread will be higher than when I opened the trade. An item of your integrity is that you tell folks to close the trade; others do not even tell you that and when the expiration comes, guess what? SURPRISE! you got assigned! And the trader could be in AK seat.
2) Is it possible to submit a credit put order to close at a future date, say, 2 days before expiration, when I open a credit put spread order?
Start 25:11
What happens if the stock price falls BETWEEN the two strike prices on expiry? I understand that you will get assigned the stock on the short put, but what happens to the long put? Thank you!
You will lose as much as it moves in the undesired direction - minus credit received
Yes, let's contnué,
Awesome! :)
Thank you for the video and it was really informative. In your example, I understand that if I close or it expires above 160, say 164, I will get to keep all or most of the credit of $130. But you mention the dangers if the price is between 160 & 155 at the time of expiration, so for example, if the price did expire at 156, then is my max risk still $370? because you mention the case of Alex Kurns and that is scary, I want to make sure I never get into that situation.
Also, what if I accidentally left it expired because I was not paying attention and it closes at 150, what is the approx loss I would face?
I saw your other comments. I am glad that the video already answered your question here. ;)
Can you do a video that explains what Price to choose to EXIT a Call Credit Spread and Put Credit Spread with a 50% Profit before Expiration?
If the combined option price for a Call Credit Spread is .90 nd I want to EXIT with a 50% Profit, do I set my EXIT Price higher or lower than .90 to EXIT the trade with a Profit?
If the combined option price for a Put Credit Spread is .90 and I want to EXIT with a 50% Profit, do I set my EXIT Price higher or lower than .90 to EXIT the trade with a Profit?
I have yet to see a video explain and show step-by-step on ThinkorSwim how to determine what EXIT Price to set when placing an EXIT Order for a Call Credit Spread or Put Credit Spread before Expiration.
Markus Heitkoetter how do you close out a position on credit spread before expiration day?
You just SELL the credit spread. Most brokerages allow you to BUY and SELL the spread instead of the individual options. Does this help?
@@rockwelltradingservices yes it helps im using two brokerage account haven't done it before. I did test it on TD Ameritrade paper money.
What skill makes a successful trader. Somewhat predicting market moves? Or finding cheap trades, i.e high probability of success against the max gian to loss ratio?
Markus doesn't try to predict the market because it is impossible to do. Instead, he uses the PowerX Optimizer to remove the guesswork. We believe that 80% of being a good trader is having the right mindset. You can have a good strategy, but if you have a bad trading mindset, you can still incur substantial losses. Good traders also stick with the plan to keep emotions at bay. Markus has an audiobook that helps people learn how to trade and invest smartly. Would you like a free copy?
@@rockwelltradingservices He does mention that particular strategies need to be aligned with a view on a market or stock. He also mentions probability of wins / loss compared to the size of wins / loss. I wondered which of these skills is more important.
Help Please Markus. I am new to Tastyworks and option trading but have a question on the comment you make at 29:30 in this video. Regarding the Danger, how exactly do you close the trade? Do you just close the Put 160 by buying it back at whatever price is available before expiration. Do you then just let the 155 Put expire? I clearly understand selling Puts but am fuzzy on how to close them before assignment. Thank you for all your patience with my questions. Working toward owning PXO in early 2021. I am retired and want to grow my retirement moneys by trading.
Hi Tom, thanks for watching and GREAT question.
If the Put is still out of the money (OTM) at the day of expiration, i.e. the current price is ABOVE the strike of the put, you can just let is expire worthless. Or you can simple buy it back, i.e. "buy to close" for a few pennies if you don't want to hold it past the close on Friday.
If it is "in the money" (ITM), then you will get assigned the shares. That's part of The Wheel strategy. After you're assigned, you would then start selling CALLS against your existing position.
Does this help?
Markus Heitkoetter
Do you often use the credit spread or mostly when market is volatile without a trend?
Hi Tom, in those market conditions, my favorite trading strategy is "The Wheel". Here's a playlist that explains this strategy in detail: ua-cam.com/play/PLBa3sAx-Io2nosgosERUhIZwzvIgD-3Vq.html
Does this help?
Wayne Gretzky made that comment
Thanks, Glenn. 😀👍
Where is this guy from?
Who? Me? I’m from Germany, and I live in Austin, TX now. 😀👍
Jawohl! Genau so ist es. Hab einen schoenen Tag 😎
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Paul Kamakande.
Papua New Guinea.
My Brokerage account is with, Interactive Brokers.
IB is awesome! ;) Thank you for watching Paul of Papua New Guinea!
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