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Credit Spread – Monthly Cashflow Generator

By Ten Nino

The Credit Spreadis 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.

A core trading strategy that is found within many of the other option trading strategies like the butterfly trade which is constructed from a credit spread and a debit spread, and also the iron condor which is built from two separate credit spreads placed on either side from where the stock or index being used is trading at.

Option traders love to trade this strategy because the way these trades are constructed can allow the trader to be wrong and still make money. If the trader creates a particular credit spread position, he or she can win if the stock or index being traded winds up doing three out of four possible scenarios. If the stock goes down, the trader makes money. If the stock goes nowhere the trader makes money. If the stock goes up a little, the trader makes money. The only way the trader can lose money if the stock goes up far enough to threaten the credit spread that has been sold. And even then, there are management and adjustment techniques that can be utilized to hedge against losses.

To demonstrate let’s invent a trade where the option trader feels as if the stock being traded is about to tank. Because he believes that this specific stock will not advance any higher from it’s current position a bear call vertical spread is sold, bringing in a nice credit.

This trade can win in 3 of 4 possible stock movement scenarios by using this option spread. If the stock drops like our trader thinks it will, the spread trade wins. If the stock doesn’t move up or down – just stays pretty much in the same area as it currently, the spread wins. Even if the stock moves upwards – defying what our trader believes will happen – this spread trade could still be profitable – as long as it doesn’t move above a certain level. So, in each of these scenarios, this trade would be profitable. The only way they would not be profitable is if the stock moves up past the level that has been sold – in which case the trader would then need to either remove the trade for a possible loss – or adjust the trade in an attempt to make it profitable once more – making this trade along with the Iron Condor a favorite among option traders.

While credit spread and Iron Condor trading can be a great way to generate passive income, of course like any investment method there are potential pitfalls one should be aware of before jumping in. To learn more about how to properly trade this option strategy, including how to correctly place, manage, and most importantly how to ADJUST them, visit our free video training website at Credit Spreads

categories: credit spread,option trading,stock trading,stock,trading,forex trading,forex,currency trading,stock market,investing,investment,finance,personal finance,wealth building

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Article Citation
MLA Style Citation:
Nino, Ten "Credit Spread – Monthly Cashflow Generator." Credit Spread – Monthly Cashflow Generator. 23 Jun. 2010. uberarticles.com. 25 Jul 2014 <http://uberarticles.com/finance/stocks-mutual-funds/credit-spread-the-foundation-of-monthly-option-income/>.

APA Style Citation:
Nino, T (2010, June 23). Credit Spread – Monthly Cashflow Generator. Retrieved July 25, 2014, from http://uberarticles.com/finance/stocks-mutual-funds/credit-spread-the-foundation-of-monthly-option-income/

Chicago Style Citation:
Nino, Ten "Credit Spread – Monthly Cashflow Generator" uberarticles.com. http://uberarticles.com/finance/stocks-mutual-funds/credit-spread-the-foundation-of-monthly-option-income/


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