Alright, so let’s dive into “Steal My 7-Step Credit Spread Blueprint (Exact Entries & Exits)”! In this video by Options with Davis, you’ll learn a comprehensive trading plan for credit spread trading. The plan includes building a watch list of index ETFs and individual stocks, as index ETFs tend to have lower volatility. You’ll also discover how to identify oversold or overbought conditions using indicators like the stochastic oscillator or RSI. Plus, you’ll gain insight into finding support and resistance levels for effective placement of credit spreads. The video also covers various trading strategies, exit strategies, and risk management techniques. Whether you’re new to credit spread trading or looking to improve your skills, this blueprint has got you covered. Happy trading!
Building a Watch List
When it comes to trading credit spreads, one of the first steps is to build a watch list of potential securities to trade. You can choose between index ETFs or individual stocks, depending on your preference. However, it is worth noting that index ETFs are generally preferred due to their lower volatility compared to individual stocks.
Research conducted by the Tastytrade team has shown that ETFs tend to stay within a narrower range compared to stocks. This is important when trading credit spreads because ideally, you want the market to stay within the expected move or move in the opposite direction of your spread. With ETFs, there is a higher level of control even if the market moves against you, which can help mitigate potential losses.
Identifying Oversold or Overbought Conditions
Once you have your watch list, the next step is to identify oversold or overbought conditions in the market. This can be done using indicators such as the stochastic oscillator or the Relative Strength Index (RSI). These indicators can help you determine if a security is trading at extreme levels and may be due for a reversal.
For example, if a security is oversold, it suggests that there is a lesser downside compared to the upside. Conversely, if a security is overbought, it suggests that there is a lesser chance for it to continue moving up compared to moving down. By identifying these conditions, you can make more informed decisions on which type of credit spread to enter into.
Importance of Support and Resistance Levels
Support and resistance levels play a crucial role in placing credit spreads. Support levels are areas where buying interest is strong enough to prevent the price from declining further, while resistance levels are areas where selling interest is strong enough to prevent the price from rising further.
When trading credit spreads, it is ideal to place your spread beyond these support and resistance levels. Placing credit spreads below support levels when a security is oversold, or above resistance levels when a security is overbought, can increase your chances of success. These levels serve as potential turning points in the market, and by placing your spread beyond them, you are positioning yourself for potential profits.
Considering Short Leg Strike Price and DTE
Another critical aspect to consider when trading credit spreads is the short leg strike price and the number of days to expiration (DTE). The short leg strike price refers to the strike price at which you sell the options, while DTE refers to the number of days left until the options expire.
The choice of the short leg strike price depends on your outlook and risk tolerance. A lower delta indicates a more conservative approach, while a higher delta indicates a more aggressive approach. It is essential to find a balance that aligns with your trading goals and risk tolerance.
Research suggests that a DTE of 45 days or more provides a statistical edge when trading credit spreads. This means that over the long run, you are more likely to be profitable with options that have 45 days or more until expiration. It is always advisable to lean on research and data when making trading decisions, as it can give you an edge in the market.
Additional Strategies and Resources
In addition to credit spreads, there are various other trading strategies and resources available to traders. Some popular strategies include credit spreads, iron condors, and other volatility-based strategies. These strategies aim to take advantage of specific market conditions and provide opportunities for profit.
The goal of these strategies is for the market to stay within an expected range, allowing traders to capture premium and generate income. It is important to analyze data and conduct proper research to determine if a strategy has an edge in the market. There are numerous resources available, such as educational resources and trading platforms, that can help traders implement and execute these strategies effectively.
Preferred Range for Trading
When it comes to the number of days until expiration, the preferred range for trading credit spreads is between 45 and 65 days. This range falls within the timeframe identified as having a statistical edge. By trading within this range, you are increasing your chances of success in the long run.
Trading within this preferred range allows for more time for the trade to develop and potentially achieve its maximum profit. It is important to remember that trading is a game of probabilities, and by trading in the timeframe with higher statistical odds, you are putting yourself in a more advantageous position.
Placing Short Leg Strike Price
The placement of the short leg strike price is a crucial decision and depends on various factors such as the underlying security, the market conditions, and your risk tolerance. When placing credit spreads, it is generally recommended to place the short leg strike price below the support area if the security is oversold.
By placing the short leg strike price below the support area, you are positioning yourself for potential profits if the market bounces off the support level and starts moving in your favor. This placement allows for a larger cushion before the trade potentially becomes at risk. Remember, it is essential to assess market conditions and use technical analysis to make informed decisions.
Determining Width of Spread
The width of the spread refers to the difference between the strike prices of the options involved in the credit spread. When determining the width of the spread, it is crucial to consider your maximum allocated risk. You should calculate the maximum potential loss and ensure it aligns with your risk management strategy.
Instead of doubling up on contracts to increase the width of the spread, it is generally recommended to widen the spread width. By widening the spread width, you can limit your risk while still potentially achieving your desired profit. Finding the right balance between risk and reward is key when determining the width of your credit spread.
Entering Trades at Specific Price Intervals
When entering trades, it is recommended to use limit orders and adjust them as necessary to get filled at a favorable price. By using limit orders, you have more control over the price at which you enter the trade. Adjusting the limit order allows you to be flexible and adapt to market conditions, ensuring that you get filled at a price that is acceptable to you.
Price discovery is an important aspect to consider when entering trades. It is essential to monitor the market and make adjustments if necessary. Price discovery can sometimes lower the credit price, allowing you to enter the trade at a more advantageous price.
Managing Risk
Managing risk is a crucial aspect of trading credit spreads. Instead of implementing a stop loss, which can be redundant and potentially lead to worse performance, it is recommended to focus on determining the maximum loss per trade. This involves calculating and setting a predetermined maximum loss that aligns with your risk tolerance and trading goals.
Exiting trades based on predetermined profit-taking or expiration dates is another method of managing risk. You can set a fixed take profit point, such as 50% of the maximum premium received, to ensure that you exit the trade with a profit. Alternatively, you can also consider exiting the trade at 21 days to expiration, which can result in lower average losses but may be more random in terms of profit/loss. It is essential to have a clear exit strategy in place to manage risk effectively.
In conclusion, trading credit spreads can be a profitable strategy when implemented correctly. By building a watch list, identifying oversold or overbought conditions, considering support and resistance levels, and managing risk effectively, you can increase your chances of success in the market. Remember to conduct proper research, analyze data, and stay consistent with your trading plan to achieve long-term profitability.