Credit Spread Options Strategies Explained (Guide w/ Examples)
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- Опубліковано 2 жов 2024
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The two credit spread options trading strategies are very simple to understand and set up, but also extremely powerful.
Credit spreads are very popular options strategies among income-driven traders, as they have a high probability of profit, have limited loss potential, and are easy to manage.
In this video, we'll clearly explain what a credit spread is, how they are set up, and go through examples to show how they profit.
Credit spreads can be constructed with all call options or put options. When constructed with all calls, the strategy is a call credit spread (sometimes called a 'bear' call spread since it's a bearish strategy).
When constructed with all puts, the strategy is a put credit spread (sometimes called a 'bull put spread' since it's a bullish strategy).
In this video, we cover two examples using historical option data to show you exactly how these two strategies make money and lose money.
Lastly, we'll show you how to set up each strategy using the tastytrade trading platform. tastytrade, Inc. (“tastytrade”) has entered into a Marketing Agreement with Project Finance(Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’ brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade and/or any of its affiliated companies. Neither tastytrade nor any of its affiliated companies is responsible for the privacy practices of Marketing Agent or this website. tastytrade does not warrant the accuracy or content of the products or services offered by Marketing Agent or this website. Marketing Agent is independent and is not an affiliate of tastytrade.
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I'm completely confused. How do you sell a put or call THEN buy another one? Don't you have to own something before you can sell it?🤔
@@billyblack3816 you can sell them without owning the underlying (naked) or with owning stock (covered). It's cheaper to sell naked calls but you're more susceptible to a good ole Guh
@@jonathandoe2321 I've learned so much sense that comment lol. But thank you.
@@billyblack3816 all good homie, hopefully you got a little cash to go with that knowledge ;)
Just wonderful, I've been looking for "what is a calendar spread option strategy?" for a while now, and I think this has helped. Have you ever come across - Consaac Dumbfounded Control - (do a google search ) ? It is an awesome one off guide for discovering how to master options trading without the normal expense. Ive heard some decent things about it and my brother in law got amazing success with it.
I must admit that this one was one of the best explained videos regarding credit spreads trading! Strong recommendation to watch for everyone!
Thank you!
@@projectfinance so one i wanted to know was since doing this kind of trade how much collateral do we need? or is it not needed as much since we are doing the spread to limit our losses?
@@Eastbaypisces the required collateral is the max loss of the trade. Example: you sell 1x $10-wide spread for $3.00. Max loss is $700 and that is the required collateral to enter the trade.
@@Eastbaypisces robinhood has a $100 minimum collateral even if the risk is less in my experience. If your risk is higher they will match that collateral. I just noticed I was risking less than 100 and they still required $100. Others may not
@@projectfinance that is the advantage for Credit Spread given the low capital requirement?
thank you great explanation!
Do I need to enable margin on my account? TOS says I don’t have margin enabled and that why I can’t trade put credit spread option.
Must I own enough underlying stock to do these trades?
My only question is, why would you take positions where you potential loss is double or triple you potential profit? It doesn’t seem to make sense to get in the habit of risking $310 to make $190. Etc... am I misunderstood?
I just answered your question in my newest video, check it out: ua-cam.com/video/0RXoIv_qwnE/v-deo.html
This is the best video explanation on YT, hands down. I've watched a couple others that made me more confused. Thank you so much!
Thank you so much for the comment! I really appreciate it!
-Chris
Totally agree THE BEST ,Others trying to confuse you with terms such as LONG( BUY) SHORT( SELL ) - PUT OR CALL its confusing as they wanted you to purchase the courses :D
This was really, really clear. Very good job, thank you!
Thank you for the comment and I'm glad the video helped!
I was trying to learn credit spreads and wasted my time with other videos with people who might be great at trading but are awful at explaining. The way you explained everything slowly and with examples was top notch. You are a great teacher. Thank you so much!
What if your account like mine got a margin call for 100 shares of stock that I sold a credit spread call on that expired worthless the last minute of the day E*TRADE called and asked for 100 shares on a margin call on Harley Davison which was worthless at time of expiration I was so disappointed
Maybe this is just an E*TRADE situation?
Dude, Thank you for having a video that actually explains what you're doing
You're welcome! I'm glad you liked the video!
-Chris
I have a question, when doing these credit spreads, do you need collateral to make these trades?
wish i could of bought some tesla at the value it was when you made this video 😢
It's a good thing you didn't do any call options though.
Lol right
@@Nundalose lol i wish i did calls
ikr
ALL STRATEGIES ARE VERY NICELY EXPLAINED. KUDOS TO YOU.JUST ONE SMALL QUERY. ALL THE TRADES END AT EXPIRATION. HOW SHOULD THE STRATEGY BE USED IF THE TRADE NEEDS TO BE CLOSED BEFORE EXPIRATION?
Best explanation ive seen.
Thanks for watching and commenting. I appreciate it!
Im still confuse. So using your call credit spread example @4:50, as long as the stock price is lower than your call credit spread, you make money? If that's the case why not do it for all 'bad' stock so that way it's guaranteed that stock price will always be lower than the credit spread?
Yes, that's correct. If the stock price is below the call credit spread's lower strike price as time passes, the spread's value will slowly go to $0 and expire worthless at expiration. Or, if the stock price falls, the spread's value will also decrease and you can buy back (close) the call spread for a profit.
You can do exactly what you're proposing, but it's not obvious which stocks will go down. Very often "bad" companies can experience large stock price increases.
You don't know the time frame of the stock price decrease, even if you're sure the company is going to fail in the long run.
A google search for "Bill Ackmann Herbalife Short" can show you how betting against "bad" companies can work out.
is there any negative or positive impact doing this on a weekly basis ?
Never sell call spreads on $TSLA. Nice video
Agreed. Never short TSLA. Never short the market (as of the current monetary policies).
I've recently learned about credit spreads but I'm having a hell of a time finding spreads that are worth the risk. You didn't get into in in your video but I'm guessing the "POP" on the trade info line means Probability of Profit? (I use IB, not Tasty, so just guessing.) In this example, is it worth the risk? 62% chance of max profit and (I'll assume the worst) a 38% chance of max loss would give you an average return of 190 x 0.62 - 310 x 0.38 = 117.8 - 117.8 = 0. (I know that the risk of max loss is a bit lower than 38% because of the curve in the spread but it still hardly seems worth it for a tiny edge.) How do you find pairs that have an expected positive return worth your time and effort? Also, how is the POP calculated?
Credit spreads aren't black and white, you can gain less then max or lose less then max if the price falls between the two strike prices by exp (or assignment).
14:30 - explanation of why the max loss is the price it is. Exactly what I was looking for, thanks man
does the spread expiration have to be long? if i know a stock is going to trading sideways for a week, can i buy weekly spread?
Omg!!! This video has helped me so much! I was so confused about credit spreads! Now I can't wait to start trading them!
Glad it was helpful!
thanks nice vid i wonder can this be used also in the futures market?
Isnt just better to sell naked put option and set some stop losses?
Curious, but isn’t the risk always higher than the rewards? Almost by 100 recent each time..
Hey so i'm confused on when to close out. Do you have to wait until the expiration date and just let it time out or do u close it when ever u have profit?
Hi Alex,
You can close an option position whenever you want. The expiration doesn't change the trading 'rules' of the contract, it just means after that expiration date the option will no longer exist.
Here's a video I just did that talks about this topic: ua-cam.com/video/IG3tJrJYd2U/v-deo.html
I hope this helps!
-Chris
Thank you, I was wondering the same thing.
Quick question, what if u get exercised or assigned? Im really confused about that? Can u please help me with that, thats my biggest worry.
Ty
@@neymarmagic3353 many platforms require you to keep collateral on hand to purchase the shares to at exercise. if you sell a put and get assigned, you but overpriced shares and take a loss. with a bull spread though, you still have the option you bought, which becomes worth more after the price drop. sell it to close and you might have enough to cover your loss
Can you close those spreads prior to expiration
Finally understand spreads. People make things so complicated. Great video.
great! a vid that actually shows how to put on a spread that makes money, not just all the gadgets that ALLOW you to sink or swim!
Thanks for the comment, Thomas!
im here because i sold a credit spread which led to an increase in the value of the spread to a price much larger than my max loss, meaning I’d have to pay way more than my max loss to close the trade. As times goes towards expiration would the loss decrease to my initial max loss?
Which spread did you sell specifically? Stock/Strikes/Expiration/Price. The spread's value may increase over the maximum width of the spread, but it shouldn't exceed the spread width by a significant amount. For instance, if you sold a $10-wide spread, the maximum spread price is $10.00. But, the spread may appear to have a value of $10.03 or $10.05 due to the bid/ask spread.
If you hold until expiration, the maximum loss is the spread width. Before expiration, an entirely in-the-money spread may trade slightly higher than the spread width (a few pennies), but not significantly.
Great explanation...thankyou.
Could you post a video explaining how far the spread should be for max profit with using the least margin.
My question...as you set the spread up on Tasty Works like you did for LUV, then does TW execute the spread all at once? Or do you have to put each leg on yourself? And if it’s the latter, what happens in a real-time market as the prices are moving and you don’t get the spread you want as you’re trying to get in one leg at a time. Same with exiting...ok, if you wait until expiration that’s self explanatory. But what if you wanted to take an early profit...again,,do you have to exit one leg at a time, or???
Awesome information thanks. Do we need 100 shares or collateral of 100 shares when using this credit spread strategy?
You are using collateral with credit spreads.
Please help:
1st Trade
I’m sitting on Call Credit Spread. Not sure what to do next.
SPY $471/$472 Calls
$0.59
@ -63.89%.
Exp date 1/7/22
Stock is already at $471 now. Should I wait until it expires of Close credit spreads?
------
2nd Trade
I’m sitting on Put Credit Spread. Not sure what to do next.
BABA $115/$110 Puts
$0.94
@ +3.09%.
Exp date 12/31/21
Stock is already at $125.15 now. Should I wait until it expires of Close credit spreads?
That was much better than your brother's explaination
Glad to hear it. :D
Why would you use a credit spread instead of a debit spread, if the risk to reward ratio is so much better on a debit spread?
Everything has a trade-off. Debit spread higher reward but lower probability of success. Credit spread lower reward but higher probability of success.
@@MT-qq1rq How is it a higher probability? That’s determined by where you place your calls and puts, not weather or not you use a debit or credit spread?
for the speeds maximum loss is always higher then then maximum profit ?
why didnt you talk about how vega effects credit spreads? Do you have another video explaining that?
cuz he doesnt know obviously. vega is a put credit spread wrecker
Yall be careful with these credit spreads, if youre new, i think im screwed, i was under the impression that your maximum loss was credit minus collateral, so i did two play credit spreads as just a mess around, max i should have lost was $19, but the when i look at the 4 contracts, and add up the two, then subtract the other two, im at a loss of over $600, i dont understand, it says account deficit, literally my two orders were a credit of $490, a collateral of $500, then the second was a credit of $141, collateral of $150, max loss supposed to be $19, the profit loss analysis showed $19 max loss, but i think im screwed, if it changes after the orders are done fully pending then i will update this comment, just trying to warn people, i did a bunch of research, clearly not enough, but i did do a bunch before trying these credit spreads out, they seemed simple and logical enough, every dang youtuber i watched even said maximum loss is credit minus collateral but what ever... Update: nah its all good, i think what robinhood does, is itll give you data and notifications out of order, like im guessing the reason it looked like i was about to lose $600 instead of $19 is because the app didnt account for the credit i recieved, making it look like im down $600, when im reality it didnt calculate your credit into the whole thing, so if this happens, dont freak out like i did, its all good
why it start with selling instead of buying?, I'm lost in that part. selling something that you haven't bought.... id like to know what I'm missing.
Watching this video compared to the other videos I’ve watched and articles I’ve read is like being taught basic addition and subtraction compared to fucking calculus. Thank fuck you exist, I’m now understanding how options aren’t just straight lottery tickets.
Thanks for the comment! I'm glad this video helped! I always try to help give people the light bulb moments.
If you close credit spreads early can you collect less credit, or must they be teken to expiry, unless I did something incorrect on TOS paper trades I closed a credit spread early because I got a signal to exit trade after 4 days of a 21 day expiry and my profit was showing zero?
Credit spreads, AKA gambling
If there is significant volatility in the market, you'll be making pennies while giving up dollars. It's a good strategy in relative calm environments and lower IV stocks imo.
Your graphs don't match the explanation. The profit field should be a flat line not a wiggly trend for large portions.
Do you have to hold credit spreads to expiration?
No you can close any time before expiration
so put credit spreads are just insured naked puts.
Yes
I've searched through thousands of videos for simplistic explanations.
Thank you so much.
THE BEST video to watch if you want to understand this concept clearly told, with examples. Explained like a Pro. Thank You 👍👍
Thank you so much for the comment!
Risk to reward ratio is so bad
To my understanding, you are limiting losses, but your rewards are limited as well. The max profits you are displaying are really low. Or maybe you can make more?
I normally gain 100% easily, so that has gotten boring since I do not trade with much anyway. I aim for minimum 1,000% when I trade options. Low risk, High Reward. But, I was considering this strategy I was informed about years ago, after a while I get tired of losing $100 bucks. But my gains outweigh the losses. If I can win every-time or most of the time, that makes me a much better trader.
Do you have a video on the risk of getting assigned
Tesla now 1900
Nutty
Thank you so much! Great video and explanation:)
Extremely expensive..HUGE margin. Not for small accounts & to waste that much capital for that long... Not smart.. Imo
I agree with you
how long do credit spreads usually last?
this is a good basic explanation video. BUT...you leave out some very dangerous info that the viewers need to know about. 1. never let them expire 2. vega /imp vol can wreck a put spread even if the spread is OTM. 3. most brokers allow the option holder to excersice 1 and a half hours after friday close...these are serious ramifications
I have been looking around to get such a detailed explanation on UA-cam and yours is the only best one. Thanks a lot.
Awesome! I'm glad this one was helpful. I'll need to make an updated version of it.
What if you do a call credit spread, let's say 25.50 and 25 , and it goes up over 25 how does assignment work if you sold a 25 call ? Would you have to close it out before expiration?
If you hold through expiration and the stock price is above your short call and below your long call you will end up shorting 100 shares of stock (per call contract) at the short call's strike. I'd recommend closing all option positions before expiration. Always.
Man you did a great job on explaining!
Thank you!
Lets say Im doing a call credit spread using the example at 4:00, is it possible to do multiples of that same strategy? Like doing 10x of those contacts with the exact same numbers?
Yep and then you 10x the max profit and loss potential
How about relative implied volatility aspects (when choosing this strategy)?
Do you mean distinguishing between 'high' and 'low' implied volatility levels before entering?
That's right yes..:)
A great explanation of credit spreads and TW. Thanks Chris! (Greg H)
Thanks so much for the comment! Glad you liked it!
Any suggestions for future topics?
What is selling a call spread? I thought you would buy 2 calls? I’m so lost on that part
Great video. But do you ever look at options strategies involving selling deep in the money puts - I just noticed that jul 24 TSLA 1900 puts are around $305. I don't want to do anything stupid (been there done that) - but I was wondering if there was a safer strategy to take advantage of some of that premium. Apart from selling the put - can you Suggest a hedging strategy to cast a wide net selling these high value puts - buy calls? spreads. Thanks for any example.
How about including some break even prices and some further explanation on what happens should the price of the stock fall somewhere within the spread at expiration?
I've watched about 10 videos trying to learn credit spread and In the first minute of this video I have learned more about Credit Spread Options than I have watching any other video. Thank you so much for making it easier to understand.
hit that subscribe button asap!
Nub question can you do this with weekly’s
Do you typically sell before expiration if you have max profit?
Or do you let it expire? Does that mean you have to exercise the shares?
Yes most of the time you will close the spread prior to expiration. If you reach a large percent of the maximum profit it makes sense to close the trade as you have little left to gain and a lot more to lose. You can close your spread anytime you want to and at whatever P/L level you may have at the current moment.
@@projectfinance Thanks!
I just bought my first call credit spread for SPY 275/277 expiring 13 April. All thanks to your video!
Its kind of confusing on how it looks on my brokerage (interactive brokers) as its showing a 23% loss even though SPY is at 273? Could you advise on how that works? Thanks
What if the stock price is in the middle of the spread at expiration time? 😮
Then the short option gets assigned and the long option expires worthless. You will end up with a stock position and large margin requirement for the stock position. If your buying power goes negative (you don’t have enough money to hold the stock position) then you’ll need to close the stock position or the brokerage will for you
Hi! Do I -HAVE- to sell and buy an option as a standard set up? I mean why buy if you are confident that the stock price will stay above (if we sell put) the strike price? Wont it be more profitable?
This might be a repetitive or dumb question: will I also make profit on top of the Max profit potential as the price keep goin up say $115+ up stock price? and do you suggest 1 week expiration?
No.
I haven't yet completely watched full video and it felt like my doubts are going solved out finally. Thank you 😊 for posting such a great content.
Finally a full explanation of credit spreads with profit and loss. Most importantly how the loss is calculated no tthat its hard to figure out most of these explanations don't show how to do it. THANKS!
I think this strategy is great...you know the risk off top and you collect the premium when it expires worthless or maybe taking a little profit along the way.................I like it....selling puts is a no brainer.
I have always lost each credit spread trade that I placed. What I do always is place a bear call/bull put spread and at the same time place a closing position with a limit order. Each time I use a limit to close a bear call to limit my loss in most cases $200 always end up in losses. What changes should I make to be profitable using this strategy?
If you feel the trade is going against you can you close the trade. IE buy it back for a reduced loss
Yes always
Don't we have to close both positions or do we let the spreads expire? I'm confused because if we short a position and close it we do have to buy back the shares right? The buy-side of the spread is a different issue altogether, isn't it?
thank you for the videos , what if scenario 1 we're to happened for both credit put/call spread? will i be assigned ? i thought i will need to roll the new spread to a higher/lower strike price accordingly
, please advise thank you
Yours was the first explanation to point out repeatedly that both options are allowed to expire worthless. Until now I believed that the trader would liquidate one, or the other, of the two options in his credit spread before it expired! Wrong.
WOW. NEED TO GO OVER THIS AGAIN, LOL🙃😐🤨
Hi if it expires between the credit spread wouldnt it make the buy option expire worthless leaving you with sell options to account for?
Can you explain the idea of the premiums narrowing for credit spreads and widening for debit spreads?
Thank you. Well explained!
So if we buy credit spread 1 week before instead of 45 , does Theta will impact credit spread?
Thanks! Great video
Thank you very much for taking the time to provide us all this helpful information. You
are doing us a great service. Sincere regards!
you talk to much i didnt come to get talked to death
in depth but great explanation.
Thank you! Glad you liked it.
So all it has to do is expire within the range of the spread? What happens if it goes lower? Do you owe money?
What I don’t get is doesn’t the short put aspect still have value at the end since trading at 324$-? Anyone can answer,, and am I right in thinking that no one would assign you except by accident cause you would end up buying shares at 315 and could then turned around and sell for 324- but could be issue if you don’t have 31,500$?
With the stock trading at $324 at expiration, the 315 put has no value because put options give the buyer the right to sell 100 shares at the strike price. When the stock price is above the put strike, there's no value in the ability to sell shares at a lower price than the shares are currently trading. In this case, the put trader has two choices if they want to sell/short shares of stock: they can sell/short shares at the current market price of $324/share, or exercise the put option and sell/short shares at $315/share.
Of course, selling/shorting shares at $324 is more advantageous than selling/shorting shares at $315 per share, which is why the 315 puts are worthless at expiration--nobody would willingly sell shares at $315 when they can sell them for $324.
Since nobody would exercise a 315 put with the stock at $324, there's a 0% chance of being assigned on the 315 short puts when the stock price is at any price above the put's strike price of $315.
In regards to getting assigned, a trader would have margin issues if they were assigned on the 315 short put and did not have enough money to actually hold the position. Normal stock margin is 50%, which means the margin requirement is 50% of the notional value of shares. In the case of 100 shares at $315/share, that's $31,500 in notional value. 50% of $31,500 is $15,750. If the trader was assigned on the short 315 put and did not have $16,000+, they would have to close the stock position (or the brokerage will do it for them).
I hope this helps!
-Chris
projectoption thanks a lot!
great vids!
Thank you!
Does anyone know of a video that takes it slower than this? Still dont understand how you're selling a put in a spread. I know how to buy and then sell a put. Can you sell a put without buying one?
Yes, it's called "shorting" an option. Are you familiar with shorting stocks? When shorting stocks, you are effectively selling shares you don't own (the specific term is called "borrowing" shares). Your objective is to sell the shares you don't own and buy them back ("cover" the shares) at a lower price. Example: You think ABC stock is going to fall to $50 from $60. You "short" 100 shares at $60/share. The stock falls to $50/share as you predicted. You buy back/cover 100 shares at $50/share. Your profit is $1,000 because you sold shares at $60 and bought them at $50/share. x100 shares = $1,000 gain.
With options it's the same thing. You can short options (sell them without owning them) and profit if the options decrease in price. If you sell an option and buy it back later at a lower price, you'll make a profit.
With selling a put spread, you are selling a put option and also buying another put option at a lower strike price. You buy the put at a lower strike price to protect yourself from big losses. When shorting stocks, you have unlimited loss potential because if you short shares at $100/share and the stock goes to $1,000, you'll have a $900 loss per share ($90,000 on 100 shares).
When shorting puts, you have significant downside loss potential because put options get more expensive as the stock price falls. By purchasing a put against the put you short, you reduce your risk.
Example #1: You short a put with a strike price of $125 and collect $5.00 for selling the put. The stock goes to $0 because the company goes bankrupt. Your put with a strike price of $125 is now worth $125.00 because the stock price is $125 below the strike price. The put's price of $125 means it's actually worth $12,500. Since you collected $500 for shorting the put initially, your loss is $12,000 on this trade.
Example #2: You short a put with a strike price of $125 and buy a put with a strike of $120. You collect $2.00 for the spread. The stock price goes to $0. Your short put is worth $125 ($12,500) but your long put is worth $120 ($12,000). Your spread's net value is $5.00 ($500). Since you sold the spread for $200 in premium and it's now worth $500, you lose $300. In this example, your loss is only $300 compared to the $12,000 loss in the first example. However, for less risk, you also had less reward. In example #1, you collected $500 for the put and therefore you could have made $500 if the put expired worthless. In example #2, you collect $200 for the spread, which means you have a max profit potential of $200 if the spread expires worthless.
I hope this helps! Let me know if you have any follow-up questions.
-Chris
@@projectfinance Wow I did not expect this good of a reply. Thank you so much this makes so much more sense. You've earned a subscriber!
Just made my first 14 dollars on spy same day call thanks alot 👍🏾👍🏾
How can I practice this strategy in demo? With CMG????seriously
It is great credit spread option lesson, I learn so much, thank you.
so in what scenarios would you buy a call or put option as compared to a credit spread?
so why is my credit spread in the green
Deep in the money we cant use this right
Let’s say you’re making profit in the trade with a Bull credit spread and you’re approaching expiration. Do you buy back what you’ve sold? Or just let it all expire. Because I thought when you let something expire you have to purchase it in full. Thanks for anyone’s help.
If you have a profit on a credit spread, you an realize/secure the profit by buying back (closing) the spread. You'll have to pay to close the spread, which means your profit per spread would be:
(Sale Price at Entry - Purchase Price at Close) x 100
If you sold a spread for $5.00 initially, and bought it back (closed it) for $1.50 later in the trade, you'd secure/realize a profit of $350 per spread: ($5.00 Sale Price - $1.50 Purchase Price) x 100 = +$3.50 x 100 = +$350.
If you let the spread expire and all of the options are out-of-the-money when they expire, the spread's value will be $0.00 and you'll keep 100% of what you initially sold the spread for.
Be careful though. If the short option is in-the-money and the long option is out-of-the-money and you hold the options through expiration, you'll end up with a stock position (long stock if you held a short in-the-money put through expiration, short stock if you held a short in-the-money call through expiration).
-Chris
I have a quick question for you.. I bought a put spread than let it expire. Now I have a sell stock but with a available stock buying power of 1,600. Can I purchase other stocks with it and hope the stock goes down to reap the most benefits.
Yes, you can purchase other stocks if you have $1,600 in stock buying power. Specifically, you can buy $1,600 worth of stock.
thank you GM to informing the public what is going on.