Directional trend trading can be challenging… to put it mildly. The market swings and surges cause financial and mental damage and can shake up even the most disciplined plan.
Predicting price correctly is a low probability prognostication.
Many investors turn to options to put the odds further in their favor, as well as dramatically lower dollar risk in comparison to stocks, but the riddle of what strike and month remain a mystery to most.
Statistics show that more than 70% of options expire worthless each month.
A credit spread strategy can benefit from where the market doesn’t go. The tactic takes advantage of time decay as each day ticks closer to expiration.
Rules:
- ALWAYS put on a spread to limit risk.
- Initiate trades about 30 days before expiration.
- Sell call options two levels of resistance higher or put options two levels of support lower. Simultaneously buy a higher call to create bear spread or lower put to create a bull spread.
- Select plays that have 80% probability.
- Credit should be minimum 20% of spread differential.
- Close out when 80% of max profit is captured.
- Repeat.
The slow and steady consistency of writing credit spreads each month can complement other strategies.
Selling bear call spreads or bull put spreads are probability plays with maximum risk and reward levels predetermined. The best and worst case scenarios are known with each day ticking off the time to profit from where the market doesn’t go…
