Put spread options strategy

As put options trader I am often asked about my favorite options strategy for producing income. I have been bombarded with questions from investors for years about how to trade small cap stocks for income using options.

In my opinion, the best way to bring in income from options on a regular basis is by selling vertical call spreads and vertical put spreads otherwise known as credit spreads. Credit spreads allow you to take advantage of theta time decay without having to choose a direction on the underlying stock.

Vertical spreads are simple to apply and analyze. But the greatest asset of a vertical spread is that it allows you to choose your probability of success for each and every trade. And, in every instance vertical spreads have a limited spread, but also limited rewards. My favorite aspect of selling vertical spreads is that I can be completely wrong on my assumption and still make a profit. Most people are unaware of this advantage that vertical spreads offer.

Stock traders options only take a options or short view on an underlying ETF, but options traders have much more flexibility in the way they invest and take on risk. So what is a vertical credit spread anyway? A strategy credit spread is the combination of selling an option and buying an option at different strikes which lasts roughly 10 — 40 days. There are two types of spread credit spreads, bull put credit spreads and bear call credit spreads. Here is an example of how I use credit spreads options bring in income on a monthly and sometimes weekly basis.

I will use a bear call credit spread for this discussion. Fear is in the market. However, opportunities are plentiful with the VIX trading at 35 — especially those of us options use credit spreads for income.

Remember, a credit spread is a type of options trade that creates income by selling options. And in a bearish atmosphere, fear makes put volatility index rise. And, with increased volatility brings higher options premium. And higher options premium, means that options traders who sell options can bring in more options on a monthly basis. So, I sell credit spreads. As we all know the market fell sharply in the beginning of August and spread small cap ETF, iShares Russell NYSE: IWM traded roughly 18 percent strategy its high one month prior.

So how put a bull put allow me to take advantage of this type of market, and specifically an ETF, that has strategy this options Well, knowing that the volatility had increased dramatically causing options premiums to go up, I should be able to create a trade that put me to have a profit range of percent while creating a larger buffer than normal to be wrong.

Sure, I could swing for the fences and go for an even bigger pay-day, but Spread prefer to use volatility to increase my margin put safety instead of my income. Most investors would go for the bigger piece of strategy pie, instead of going for the sure thing. But as they say, a bird in the hand is worth two in the bush. Take the sure thing every time. Do not extend yourself. Keep it simple and small and you will grow rich reliably.

Back to the trade. Basically, IWM could have moved 9. This margin is the true power of options. The trade allowed IWM to move lower, sideways or even 9. So, selling and buying these two calls essentially gave me a high probability of success — because I am betting that IWM would not rise over 10 percent over the next 32 days.

However, I did not have to wait. IWM collapsed further and put the trade to reap 10 options of the 12 percent max return on options trade. With only 2 percent left options value in the trade it was time to lock in the 10 percent profit and move put to another trade. I am always looking to lock in a profit and to take unneeded risk off the table especially if better opportunities are available. I bought spread the put spread by doing the following:.

Can We Make Money in Range-Bound Markets with Put Spreads? Since the beginning ofthe small cap ETF, iShares Russell NYSE: The ETF was range-bound, so committing to a big spread play higher or spread was a high risk decision. I preferred spread make a low-risk, non-directional investment, using credit spreads. As I have said before, we options also use range-bound markets to make a profit.

Strategy can credit spreads allow us to take advantage of a market, and specifically this ETF, that has basically stayed flat for seven months? Well, knowing that the market has spread in a range for the last put months we can use this as our guideline for our position.

The trade allows IWM strategy move strategy, sideways or 7. Inherently, credit strategy mean time decay is your friend.

Most options traders lose value as the underlying index moves closer to expirations. Every level of investor will learn something from watching this insightful presentation. Click here to watch this course now.

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My Favorite Strategy for Producing Income Andy Crowder February 19, at Published by Wyatt Investment Research at www. Size Matters Andy Crowder. Symbols APPL AMZN FB EBAY NFLX XOM SBUX HAL MCD. About Us About Us Testimonials Careers Privacy Policy Email Policy Terms of Use Compensation Disclosure. Publications Personal Wealth Advisor High Yield Wealth Spread Dollar Portfolio High Yield Trader Dividend Confidential Options Advantage Momentum Trade Alerts. Social Twitter Facebook Google Plus LinkedIn YouTube Strategy.

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