In the video titled “Steal My 7-Step Credit Spread Blueprint (Exact Entries & Exits)” by Options with Davis, you will learn a comprehensive and simple trading plan for credit spreads. The plan consists of seven steps, starting with building a watchlist of index ETFs and individual stocks. By using indicators like the stochastic oscillator or RSI, you can identify oversold or overbought conditions in the market. Support and resistance levels play a crucial role in placing credit spreads, and considering the days to expiration (DTE) and strike prices is essential. The video also discusses the advantages of index ETFs over individual stocks, as well as exit strategies and risk management techniques. Overall, this video provides valuable insights and a step-by-step guide for trading credit spreads effectively.
Building a Watch List
Using Index ETFs
Including Individual Stocks
When it comes to building a watch list for trading credit spreads, there are two main options to consider: index ETFs and individual stocks. While both can be viable choices, there are advantages to using index ETFs, particularly in terms of volatility.
Index ETFs are generally less volatile than individual stocks, which can make them a preferred choice for trading credit spreads. The Tastytrade team has conducted a study that shows the standard deviation moves for ETFs compared to stocks. The data suggests that ETFs tend to stay within a narrower range, while stocks have a much wider range of movement.
In credit spread trading, it is ideal for the market to stay within a certain range. This way, the spreads have a higher chance of success. While stocks can be profitable if the market moves in the opposite direction of the spread, there is also a higher risk if the market moves against the spread. ETFs, on the other hand, offer a more controlled and less volatile trading environment.
When building your watch list, you can choose to focus solely on index ETFs or include individual stocks. It is important to consider your own preferences and risk tolerance when making this decision. If you prefer a more stable trading environment with less volatility, index ETFs may be the better choice for you.
Prefer ETFs for Less Volatility
Advantages of ETFs in Credit Spreads
When it comes to trading credit spreads, there are several advantages to using ETFs. These advantages stem from the lower volatility typically associated with index ETFs compared to individual stocks.
Firstly, ETFs offer a more controlled and predictable trading environment. This can be beneficial for traders who prefer less volatility and want to increase their chances of success in credit spread trading. By trading ETFs, traders can have more confidence in the expected range of the market and the potential outcomes of their credit spreads.
Secondly, ETFs can provide a broader exposure to the market. Instead of relying on the performance of one individual stock, traders can diversify their portfolio by trading ETFs that track a specific index or sector. This diversification can help to mitigate risk and potentially increase the overall profitability of credit spread trades.
Lastly, trading ETFs can be more cost-effective. ETF options typically have lower trading fees and spreads compared to options on individual stocks. This can be advantageous for traders who are looking to optimize their trading costs and maximize their returns.
Overall, the lower volatility of ETFs makes them a preferred choice for many traders in credit spread trading. The controlled trading environment, diversification opportunities, and cost-effectiveness of trading ETFs can contribute to a more successful and profitable trading experience.
Identifying Overbought/Oversold Conditions
Using Indicators
Stochastic Oscillator
RSI
To effectively execute a credit spread trading plan, it is important to identify overbought or oversold conditions in the market. These conditions can provide valuable insights into potential trading opportunities.
Indicators such as the Stochastic Oscillator and the Relative Strength Index (RSI) can be used to identify overbought or oversold conditions. These indicators measure market momentum and can help traders determine when a particular stock or ETF may be due for a reversal.
The Stochastic Oscillator is a popular technical indicator that compares the closing price of a security to its price range over a given period. It consists of two lines, %K and %D, which oscillate between 0 and 100. Values above 80 indicate overbought conditions, while values below 20 indicate oversold conditions.
The RSI, on the other hand, is a momentum oscillator that compares the magnitude of recent gains to recent losses. It ranges from 0 to 100 and is typically considered overbought when above 70 and oversold when below 30.
By using these indicators, traders can identify potential entry points for their credit spread trades. When a stock or ETF is overbought, it may be a good time to consider selling a call credit spread. Conversely, when a stock or ETF is oversold, it may be a good time to consider selling a put credit spread.
It is important to note that indicators should not be used in isolation but should be used in conjunction with other technical analysis tools and market research. Traders should also consider their own risk tolerance and market outlook when making trading decisions based on overbought or oversold conditions.
Importance of Support and Resistance Levels
Placing Credit Spreads
Goal of Placing Beyond Support/Resistance
Support and resistance levels are key concepts in technical analysis and play an important role in placing credit spreads. These levels can help traders identify potential price reversals and determine optimal entry and exit points for their trades.
Support levels are price levels at which the market has historically had difficulty falling below. They act as a floor for prices and indicate areas of buying interest. Resistance levels, on the other hand, are price levels at which the market has historically had difficulty breaking above. They act as a ceiling for prices and indicate areas of selling pressure.
When placing credit spreads, the goal is to place the spread beyond the support or resistance levels. This is because support and resistance levels are areas where the market may reverse and change direction. By placing the credit spread beyond these levels, traders can increase the probability of the spread expiring profitably.
For example, if a stock is trading near a strong support level, traders may consider selling a put credit spread with the short leg strike price below the support level. This way, if the stock remains above the support level, the spread has a higher chance of expiring profitably. If the stock breaks below the support level, the spread provides some downside protection.
Similarly, if a stock is trading near a strong resistance level, traders may consider selling a call credit spread with the short leg strike price above the resistance level. This way, if the stock remains below the resistance level, the spread has a higher chance of expiring profitably. If the stock breaks above the resistance level, the spread provides some upside protection.
By considering support and resistance levels when placing credit spreads, traders can align their trades with potential market reversals and increase their chances of success.
Considering DTE and Strike Price
Key Factors to Consider
Lower Delta for Conservative Approach
Higher Delta for Aggressive Approach
When trading credit spreads, two key factors to consider are the Days to Expiration (DTE) and the strike price of the short leg. These factors can greatly influence the risk and potential profitability of the trade.
DTE refers to the number of days remaining until the options contracts expire. It is an important consideration because the time decay of the options accelerates as expiration approaches. Generally, the shorter the DTE, the faster the time decay. This means that options with a shorter expiration time frame may offer a higher potential return on investment but also come with increased risk.
Research suggests that options with a DTE of under 45 days may not have a statistical edge. This means that the expected move of the market may not be significantly greater than the realized move during this time frame. It is therefore advisable to focus on options with a DTE of 45 days or more, where the statistical edge is more likely to be present.
The strike price of the short leg is another important factor to consider. A lower delta for the short leg strike price indicates a more conservative approach, with a higher probability of the spread expiring profitably. On the other hand, a higher delta for the short leg strike price indicates a more aggressive approach, with a higher potential return but also increased risk.
The choice of DTE and strike price should be based on your risk tolerance, market outlook, and trading strategy. It is important to carefully consider these factors and conduct thorough analysis before placing credit spreads to ensure the best possible outcome.
Statistical Edge of Options
Importance of DTE
Options with DTE under 45 Days May Not Have Edge
In credit spread trading, having a statistical edge is crucial for long-term success. A statistical edge refers to a trading strategy that has a higher probability of success in the long run compared to random chance.
When analyzing the statistical edge of options, one key factor to consider is the Days to Expiration (DTE), which refers to the number of days remaining until the options contracts expire. Research has shown that options with a DTE of under 45 days may not have a statistical edge.
This means that the expected move of the market during this time frame may not be significantly greater than the realized move. As a result, trading options with a DTE of under 45 days may have a lower probability of success compared to options with a longer time frame.
It is important to note that this research is based on historical data and market patterns. While it provides valuable insights, it does not guarantee future performance. Traders should always conduct their own analysis and consider market conditions before making trading decisions.
When selecting options for credit spread trading, it is advisable to focus on options with a DTE of 45 days or more. This time frame is more likely to offer a statistical edge and increase the likelihood of profitable trades.
By considering the statistical edge of options and selecting options with a favorable DTE, traders can increase their chances of success in credit spread trading.
Promotion of Options Income Blueprint
Free Blueprint Offer
Encouragement to Subscribe for More Content
As mentioned earlier, there is a free Options Income Blueprint available for traders interested in credit spread trading. This blueprint provides a simple and comprehensive trading plan for entering and exiting credit spread trades. It offers exact entries and exits, making it an invaluable resource for traders looking to trade credit spreads safely and profitably.
The Options Income Blueprint is a valuable tool for both experienced traders and those new to credit spread trading. It provides step-by-step guidance on how to execute credit spread trades effectively, including how to identify potential entry and exit points, manage risk, and optimize returns.
To access the free Options Income Blueprint, traders can subscribe to the Options with Davis channel. By subscribing, traders will gain access to this valuable resource and receive regular updates and content related to credit spread trading.
Subscribing to the Options with Davis channel offers many benefits, including continued learning and access to a community of like-minded traders. By staying informed and connected, traders can continually enhance their skills and increase their chances of success in credit spread trading.
Credit Spreads and Iron Condor Put Spreads
Strategies Discussed
In the Options Income Blueprint, two key strategies discussed are credit spreads and iron condor put spreads. These strategies can be highly effective in generating income and managing risk in options trading.
Credit spreads involve selling one option and buying another option with the same expiration date but a different strike price. This strategy allows traders to collect a premium while limiting their potential losses. The spread between the two strike prices represents the maximum potential loss on the trade.
Iron condor put spreads are a more advanced strategy that involves selling both a put credit spread and a call credit spread on the same underlying instrument. This strategy allows traders to profit from a range-bound market, where the underlying instrument stays within a certain price range.
Both credit spreads and iron condor put spreads offer limited risk and limited profit potential, making them popular strategies among options traders. These strategies are particularly well-suited for traders looking to generate income while managing risk effectively.
By implementing these strategies and following the guidelines provided in the Options Income Blueprint, traders can increase their chances of success in options trading and achieve their financial goals.
Maximizing Success with Expected Range
Goal of Having Market Stay Within Expected Range
Preferred Time Frame for Strategies
A key goal in credit spread trading is to have the market stay within the expected range. This refers to the range of prices within which the trader anticipates the underlying instrument will stay until options expiration.
By aligning the credit spreads with the expected range, traders can increase their chances of success and achieve their desired profit targets. If the market stays within the expected range, the spread is more likely to expire profitably.
To maximize success, it is important to determine the expected range based on thorough analysis and research. This can involve studying historical price patterns, analyzing technical indicators, and considering market conditions and trends. The expected range should be aligned with the trader’s risk tolerance and trading strategy.
It is also important to consider the preferred time frame for credit spread strategies. Generally, a time frame of around 45 to 65 days is preferred, as this allows for a sufficient DTE to capture potential price movements while also managing risk effectively.
By focusing on the expected range and selecting an appropriate time frame, traders can maximize their chances of success and achieve consistent profitability in credit spread trading.
Avoiding Redundant Stop Loss and Focusing on Risk
Max Risk per Trade
Exiting Based on Profit or Time
In credit spread trading, it is important to focus on risk management and avoid redundant stop loss orders. Stop loss orders are commonly used to limit losses and protect against unfavorable market movements. However, in credit spread trading, adding a stop loss can be redundant and potentially detrimental to performance.
Instead of relying solely on stop loss orders, traders should focus on determining the maximum risk per trade. This involves calculating the potential loss on the credit spread and setting a maximum risk level that aligns with the trader’s risk tolerance.
By focusing on risk management and setting a maximum risk per trade, traders can effectively manage their exposure and limit potential losses. This approach allows for more flexibility in exit strategies and avoids unnecessary stop loss orders.
When it comes to exiting credit spread trades, there are two main approaches to consider: exiting based on profit or exiting based on time. Exiting based on profit involves setting a predetermined profit target and closing the trade when that target is reached. This allows traders to lock in profits and maximize returns.
Exiting based on time involves closing the trade at a specified time before options expiration, regardless of the profit or loss. One common time frame for exiting credit spreads is at 21 DTE (days to expiration). This approach allows traders to manage risk effectively and avoid potential losses as options near expiration.
It is important for traders to determine their preferred exit strategy and establish clear guidelines before entering credit spread trades. By having a well-defined plan for exiting trades, traders can maintain discipline and make informed decisions based on their goals and risk tolerance.
In conclusion, focusing on risk management and avoiding redundant stop loss orders can contribute to more successful credit spread trading. By determining the maximum risk per trade and exiting based on profit or time, traders can effectively manage risk and achieve their financial goals.