馃攳
The BEST Credit Spread Option Strategy Video Tutorial - Credit Spreads - YouTube
Channel: Option Alpha
[0]
Hey everyone and welcome to the credit spreads
video tutorial here at Option Alpha.
[5]
And what I wanted to do in this video tutorial
is go over what a credit spread is, and how
[9]
we use them in particular, here at Option
Alpha.
[12]
Now, we use them a little bit different.
[14]
We sell credit spreads here, and we collect
a premium upfront and hope that the options
[20]
decay in value over time.
[22]
And then we get to keep that premium.
[23]
So, this is a little bit different type of
strategy, but it is by far, the most successful
[28]
strategy that we do have here at Option Alpha.
[31]
Now, here is a payoff diagram of a typical
credit spread.
[35]
And this can go either way, but I just wanted
to go over this diagram for you here.
[39]
And you can see that here is your profit lost
line that is going up and down here.
[45]
And then you have the stock price at expiration
which is this horizontal line here.
[49]
And here, you can see that this is a stock
price value of 40, a value of 42, and a value
[55]
of 45 for this particular example.
[57]
Now, you can see at expiration, for example,
if the stock was trading at $40 for this particular
[63]
credit spread, then you would lose about $200.
[67]
And the same thing goes with anything below
40 as well.
[71]
If the stock closes anything below 40, then
you would still lose your $200 and no more.
[78]
Now, if the stock closed at 42, in this particular
instance, you would make no money, but you'd
[84]
also lose no money on this trade.
[85]
So, you'd get back nothing on your investment.
[89]
If the stock trades at 45 or higher, then
you make $300 and no more than that.
[96]
So, if the stock traded up to 60 or 70, you
would still make your $300 profit.
[101]
So now, how we use credit spreads here at
Option Alpha is a little bit different, like
[106]
I said.
[107]
We actually are selling credit spreads, and
we want to sell credit spreads far from the
[112]
current market price and let the market move
as it does, and we want to stay away and let
[117]
those options expire, giving us that credit
which you see here, that $300 credit or $200
[124]
credit, at expiration as a premium that we
keep in our portfolio.
[129]
So, here's a quick chart of a general stock
that we just picked out, no dates, no times,
[134]
no stock that you're looking at.
[136]
And our strategy for the credit spreads portfolio
would be to do one of two things: To either
[142]
build a credit spread below the market or
to build a credit spread above the market.
[148]
Now, in either case, the market can move a
little bit higher, a little bit lower.
[152]
It can even trade sideways.
[153]
So, it's a great market neutral strategy that
we have here.
[157]
So long as the market doesn't go beyond our
strike prices that we've built, either higher
[161]
or lower than the market, then we get to keep
all of our money.
[166]
For example: If we were to build a credit
spread below the market, we would then sell
[172]
a put at let's say, a strike price of 40.
[175]
So, that's the first leg of the credit spread.
[178]
It's to sell a put at a strike price of say,
40, and then buy another put at a strike price
[186]
of 39.
[187]
So, what's going to happen is that so long
as the market, or this stock, or ETF trades
[192]
above that $40 level, then we get to keep
our entire premium that we collected on that
[198]
trade.
[199]
Now, if we were to enter a spread above the
market, it would look something like this.
[204]
We would sell a call at a strike price of
50, and buy a call at a strike price of 51.
[212]
And again, the same thing happens in reverse.
[214]
So long as the market trades below our strike
price at 50, then we get to keep all of our
[220]
money that we have.
[221]
Now, the natural question that most people
ask is what happens if the market trades beyond
[226]
that level.
[227]
The market trades beyond that level with credit
spreads; then you just lose the money that
[231]
you had put up for margin.
[233]
So in this case, we would always disclose
what we're going to be putting up for margin,
[237]
and that would be our max investment.
[239]
For example: If the stock were to get bought
out, or the market would've crashed, or something
[243]
dramatic were to happen in a short period,
that's the only way that we can lose money
[248]
on credit spread trading.
[250]
So again, I hope this video tutorial has been
helpful to you guys.
[253]
And as always, if you have any questions,
please email us or contact us.
Most Recent Videos:
You can go back to the homepage right here: Homepage