In “The Ultimate Credit Spread Income Strategy” video by Options with Davis, you will learn how to find the best setups for credit spreads each day. The video provides a step-by-step guide on building a watchlist of stocks and Index ETFs, and timestamps are provided for specific topics covered in the video. The strategy focuses on two types of spreads: the bull put spread for bullish trades and the bear call spread for bearish trades. Steps for each spread are outlined, including how to identify support and resistance levels, determine strike prices, and construct the spread. The video also discusses the importance of analyzing charts and indicators, selecting expiration dates, and managing trades.
The host encourages viewers to give a thumbs up, leave comments or questions, and subscribe for more videos on related topics. The “Ultimate Credit Spread Income Strategy” is designed for small trading accounts under $25,000 and recommends trading index ETFs over individual stocks for lower risk. The presenter shares their evaluation process for potential trades, discusses different management styles, and explains how position sizing is determined based on account size. Overall, this video offers a comprehensive guide for traders looking to implement a credit spread income strategy.
Overview of the Ultimate Credit Spread Income Strategy
The Ultimate Credit Spread Income Strategy is a trading strategy specifically designed for small trading accounts, particularly those with a balance under $25,000. This strategy, as explained in a video by Options with Davis, focuses on finding the best setups for credit spreads each day. The video provides a step-by-step guide on building a watchlist of stocks and Index ETFs, and timestamps are provided for specific topics covered in the video. Additionally, the video mentions other related videos on topics such as rolling covered calls, the stock repair strategy, the wheel strategy, and credit spreads.
Suitability for Small Trading Accounts
The Ultimate Credit Spread Income Strategy is particularly well-suited to small trading accounts. With a trading account balance under $25,000, it can be challenging to engage in certain types of trades. However, the credit spread strategy offers a way for traders with smaller accounts to actively participate in the options market and potentially generate income. By understanding the specific steps involved in constructing and managing credit spreads, small account traders can make informed decisions and benefit from this strategy.
Types of Spreads
The Ultimate Credit Spread Income Strategy primarily focuses on two types of spreads: the bull put spread and the bear call spread. The bull put spread is a bullish trade strategy, while the bear call spread is a bearish trade strategy. Each spread has its own set of steps and criteria for implementation. By understanding the mechanics and criteria for both types of spreads, traders can be prepared to take advantage of various market conditions and trade setups.
Preference for Index ETFs
In the Ultimate Credit Spread Income Strategy, there is a preference for trading Index ETFs over individual stocks. This preference is driven by the lower risk associated with trading ETFs compared to individual stocks. ETFs provide exposure to a diversified basket of stocks, which can help mitigate the impact of adverse events on a single stock. Additionally, ETFs tend to have higher liquidity compared to individual stocks, making it easier to enter and exit positions. Traders implementing this strategy should consider focusing on Index ETFs to take advantage of these benefits.
Steps for the Bull Put Spread
The bull put spread is a bullish trade strategy, and the following steps outline how to identify and execute this type of spread:
Identifying Oversold Readings in Stochastic Oscillator
The first step in the bull put spread strategy is to look for oversold readings in the stochastic oscillator. The stochastic oscillator is a momentum indicator that helps identify potential overbought or oversold conditions in a security. By identifying oversold readings, traders can find potential bullish opportunities in the market.
Identifying Nearest Support Level
Once oversold readings are identified, the next step is to identify the nearest support level or the previous low. This support level serves as a reference point for determining the short put strike level in the spread.
Determining Short Put Strike Level
The short put strike level should ideally be at or below the identified support level. This ensures that the trade is positioned to benefit from a potential upward move in the underlying security.
Checking Delta Range
After determining the short put strike level, it is important to check if it falls within the desired delta range. In this strategy, the ideal delta range for the short put strike level is between 20 to 30. This allows traders to sell a put spread out of the money, which carries less risk.
Constructing the Spread
Once all the criteria are met, traders can construct the bull put spread. This entails selling a put option with a strike price below the current market price and buying a put option with a lower strike price to limit potential losses.
Aiming for Credit Range
When constructing the spread, it is important to aim for a credit range of at least $1 to $1.50. This credit represents the potential profit from the spread and should be considered when assessing the risk-reward ratio.
Placing a Limit Order
To execute the bull put spread, traders should place a limit order at their desired credit level. A limit order ensures that the trade is executed at a specific price or better, allowing traders to maintain control over the trade’s execution.
Steps for the Bear Call Spread
The bear call spread is a bearish trade strategy, and the following steps outline how to identify and execute this type of spread:
Identifying Overbought Readings in Stochastic Oscillator
Similar to the bull put spread, the first step in the bear call spread strategy is to look for overbought readings in the stochastic oscillator. Overbought readings indicate potential bearish opportunities in the market.
Identifying Nearest Resistance Level
Once overbought readings are identified, the next step is to identify the nearest resistance level or the previous high. This resistance level serves as a reference point for determining the short call strike level in the spread.
Determining Short Call Strike Level
The short call strike level should ideally be at or above the identified resistance level. This ensures that the trade is positioned to benefit from a potential downward move in the underlying security.
Checking Delta Range
After determining the short call strike level, it is important to check if it falls within the desired delta range. In this strategy, the ideal delta range for the short call strike level is between 20 to 30. This allows traders to sell a call spread out of the money, reducing risk exposure.
Constructing the Spread
Once all the criteria are met, traders can construct the bear call spread. This entails selling a call option with a strike price above the current market price and buying a call option with a higher strike price to limit potential losses.
Aiming for Credit Range
When constructing the spread, traders should aim for a credit range of at least $1 to $1.50, similar to the bull put spread. This credit represents the potential profit from the spread and should be considered when assessing the risk-reward ratio.
Placing a Limit Order
To execute the bear call spread, traders should place a limit order at their desired credit level. This ensures that the trade is executed at a specific price or better, maintaining control over the trade’s execution.
Important Factors for Trade Setups
In addition to the specific steps involved in constructing the bull put spread and bear call spread, there are several important factors to consider when identifying trade setups:
Analyzing Charts and Indicator Readings
Analyzing charts and indicator readings, such as the stochastic oscillator, is crucial to identifying potential trade setups. Traders should look for oversold or overbought readings in the oscillator, as well as support and resistance levels on the charts.
Choosing Expiration Date
The expiration date for the options used in the credit spreads is an important consideration. While there is flexibility in choosing the expiration date, a preference for around 30 to 60 days is mentioned in the video. Specifically, a target expiration date of around 44 days is suggested.
Determining Delta Range
The delta range for the short put or call strike level is also a key factor. By aiming for a delta range of 20 to 30, traders ensure that the options sold in the spread are out of the money, reducing risk exposure.
Considering Liquidity of Options
The liquidity of the options being traded is an important factor to consider. Weekly options may have lower liquidity compared to monthly options, potentially affecting the ease of entering and exiting positions. Traders should ensure that the options being traded have sufficient liquidity to facilitate smooth execution of trades.
Using think or Swim Trading Platform
The think or Swim trading platform is recommended in the video for analyzing charts, monitoring trades, and placing orders. This platform provides a comprehensive range of tools and features that can assist traders in implementing the Ultimate Credit Spread Income Strategy effectively.
Evaluation and Management of Trades
After placing trades, it is essential to evaluate and manage them effectively to maximize profitability. The video discusses several important aspects of evaluating and managing trades:
Assessing Trade Criteria
Traders should consistently assess their trades against the predetermined criteria for the credit spreads. If a trade does not meet the specific criteria, such as falling short of the desired credit spread, it may be advisable to wait for more favorable market conditions or seek alternative setups.
Example Trade Analysis
The video provides an example trade analysis showcasing the application of the strategy’s criteria and management styles. In the example, the first trade does not meet the criteria due to a low credit spread, prompting the presenter to wait for a higher credit before placing the trade. The second trade is placed based on an overbought market condition, with a short call spread at a specified level.
Management Styles
The video explains different management styles for trades, including taking profit at 50% of the credit received. Traders can choose to close their positions and realize profits when the credit received reaches half of the initial credit. Additionally, the evaluation of trades after 21 days is recommended, allowing traders to assess the progress and adjust their positions if needed.
Profit Targets
Setting profit targets is an important aspect of trade management. Traders should establish specific profit targets based on their risk-reward preferences and adjust their positions accordingly when those targets are met.
Monitoring Trades
Continuously monitoring trades is crucial to effectively manage risk and make informed decisions. Traders should regularly review the performance of their trades, monitor market conditions, and utilize tools and features provided by the think or Swim trading platform to stay updated.
Considering Different Stocks and Position Sizing
When implementing the Ultimate Credit Spread Income Strategy, traders have the flexibility to consider different stocks and determine their position sizing based on their account size:
Trade Selection
Traders can select stocks or Index ETFs based on their preferences and market analysis. The video suggests focusing on liquid stocks within the price range of $100 to $500. By carefully selecting trades, traders can identify the most suitable opportunities that align with their trading objectives.
Position Sizing Based on Account Size
Position sizing is an important factor to consider, especially for small trading accounts. Traders can determine their position size based on their account balance and risk tolerance. By allocating a specific percentage of their account to each trade, traders can effectively manage their risk and potential returns.
Conclusion
The Ultimate Credit Spread Income Strategy offers small trading accounts a viable option for participating in the options market and potentially generating income. By following the steps outlined for the bull put spread and bear call spread, traders can identify suitable trade setups and implement them effectively. Additionally, considering important factors such as chart analysis, expiration dates, delta range, liquidity, and using the think or Swim trading platform can enhance the overall success of the strategy. By continuously evaluating and managing trades, adjusting positions when necessary, and considering different stocks and position sizing, traders can optimize their results and achieve their trading goals.