May 14, by The tastytrade Team. Credit spreads are generally the strategy of choice around here at tastytrade since they are a fairly easy to grasp strategy and are risk defined meaning you know how much you stand to gain or lose before you even place the trade.
Instead of going in depth on the topic of credit spreads, we instead wanted to break down a few of the things you should think about before placing a credit spread. Without further ado, here are four keys to trading vertical credit spreads A credit spread is simply a spread that you sell regardless of whether it is a put spread, or call spread.
When you sell a spread, you receive a credit for the trade. What does that mean exactly? That means you receive cash up front for the trade! The amount you sold the spread for is instantly added to your account. Credit spreads are risk defined spreads so your max profit and max loss are both defined before you even place the trade.
Max profit is the credit you receive for selling the spread - you can't make any more money than the initial credit received. Max loss is the difference between the width of the spread and the credit received for selling the spread. As we mentioned before, when you sell a vertical put spread, your market assumption is bullish. If you are selling a vertical call spread, your market assumption is bearish. The basic answer to that question is that when an underlying has a high IV rank, option prices are more expensive so you can receive a bigger credit up front than you would from an underlying with low IV rank.
So how do you know what a good price is for a trade aka how much credit you should collect from the trade? Rather than focusing on how much credit you should receive, focus on the probability of your trade being successful! Oh, and one last thing Four simple keys to figuring out vertical credit spreads Learn more about options trading with Step Up to Options. Most investors are familiar with what earnings are, but less know about the different strategies and considerations when investing in a company with upcoming earnings.
In this post you will learn about what earnings are, the terminology associated with earnings, and how you can place an 'earnings trade. Strike price is an important options trading concept to understand. This post will teach you about strike prices and help you determine how to choose the best one. There are two types of credit spreads: So what do you think? The ideal time to sell verticals is when the underlying has a high IV Rank. Why is that exactly?More...