In “The Ultimate Credit Spread Income Strategy” video by Options with Davis, you will learn all about credit spreads and how they can be a great option trading strategy for small trading accounts. The video covers topics such as building a watchlist of stocks and index ETFs, identifying trade setups for credit spreads, selecting the right strike levels, using the think or Swim trading platform, and more. With step-by-step instructions and helpful tips, this video aims to provide you with the knowledge and tools to make informed trading decisions and maximize your income potential. Don’t forget to like the video, leave comments, and ask any questions you may have!
This video offers valuable insights into the world of credit spreads and provides a comprehensive guide to finding the best setups for successful trading. Whether you’re a beginner or an experienced trader, the Ultimate Credit Spread Income Strategy video has something for everyone. From understanding the two types of credit spreads, to learning about key indicators and levels to monitor, to exploring position sizing and management styles, this video covers it all. Plus, the presenter encourages you to customize the strategies to suit your own trading style. So sit back, relax, and get ready to take your options trading to the next level with the Ultimate Credit Spread Income Strategy!
The Ultimate Credit Spread Income Strategy
Introduction to Credit Spreads
Welcome to the Ultimate Credit Spread Income Strategy. In this article, we will explore the world of credit spreads and how they can be used as an effective option trading strategy for small trading accounts. Credit spreads allow traders to generate income by selling options contracts while simultaneously buying options contracts to limit risk. This strategy is ideal for those with smaller trading accounts as it requires less capital compared to other trading strategies.
Types of Credit Spreads
There are two types of credit spreads: the bull put spread and the bear call spread. The bull put spread is a bullish trade where the trader sells a put option with a higher strike price and buys a put option with a lower strike price. This strategy profits when the underlying asset’s price remains above the sold put option’s strike price. On the other hand, the bear call spread is a bearish trade where the trader sells a call option with a lower strike price and buys a call option with a higher strike price. This strategy profits when the underlying asset’s price remains below the sold call option’s strike price. Both strategies aim to generate income through the credit received from selling the options contracts.
Step-by-step Instructions for Identifying Trade Setups
To identify trade setups for credit spreads, there are several steps you can follow:
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Step 1: Oversold or Overbought Condition – For a bull put spread, look for an oversold reading on the stochastic oscillator. This indicates that the asset may be due for a price increase. For a bear call spread, look for an overbought reading on the stochastic oscillator. This indicates that the asset may be due for a price decrease.
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Step 2: Identify Support or Resistance Levels – For a bull put spread, identify the nearest support level or the previous low. This level can serve as a reference point for potential price reversals. For a bear call spread, identify the nearest resistance level or the previous high. This level can indicate potential price reversals.
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Step 3: Choose Short Option Strike Level – Select a short put strike level within a certain delta range for a bull put spread. Ideally, this strike level should be at or below the support level identified in Step 2. For a bear call spread, select a short call strike level within a certain delta range. Ideally, this strike level should be at or above the resistance level identified in Step 2.
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Step 4: Review Option Chain – Check the option chain to see if the selected short option strike level is within a 20 to 30 delta range. This ensures that the options contracts are out of the money and have a higher probability of expiring worthless.
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Step 5: Construct the Spread – Construct the credit spread by selling the short option and buying the long option. Ensure that the spread has a target credit of at least $1 to $1.50. The spread width will depend on the chosen strike prices, with a typical range of $5 for small trading accounts.
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Step 6: Place a Limit Order – Place a limit order at the desired credit level to enter the trade when the market conditions are met.
Criteria for Placing a Trade
When placing a trade using the Ultimate Credit Spread Income Strategy, it is important to consider specific criteria to increase the chances of success. These criteria include:
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Oversold or Overbought Condition – Wait for the asset to reach an oversold condition for a bull put spread or an overbought condition for a bear call spread. This increases the probability of a price reversal in your favor.
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Support or Resistance Levels – Ensure that the chosen short option strike level aligns with a support or resistance level. This provides additional confirmation of potential price reversals.
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Option Delta Range – Select short option strike levels within a 20 to 30 delta range. This ensures that the options contracts are out of the money and have a higher probability of expiring worthless.
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Target Credit – Aim for a credit of at least $1 to $1.50 when constructing the credit spread. This ensures that the risk-reward ratio is favorable, with limited potential losses and potential profits.
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Limit Order – Place a limit order at the desired credit level to enter the trade. This allows you to enter at the desired price and ensures that you do not overpay for the options contracts.
Management Styles for Trades
Managing trades is an essential part of any trading strategy, including credit spreads. There are multiple management styles you can employ to protect your trades and maximize profits:
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Taking Profit – Consider taking profits when the credit received reaches a certain percentage of the maximum potential profit. For example, you may choose to close the trade when you have captured 50% of the credit or when the trade reaches a certain time duration.
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Exit Strategies – Determine exit strategies when the trade is not going in your favor. This could involve adjusting the spread, rolling it to a different expiration date, or closing the trade to limit losses.
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Monitoring Indicators – Continuously monitor the stochastic oscillator or other technical indicators for signs of overbought or oversold conditions. This will help you identify potential exit points or adjustments for your credit spreads.
Position Sizing and Finding the Best Setups
Position sizing is crucial when trading credit spreads, especially for small trading accounts. It is important to manage risk and allocate the appropriate amount of capital to each trade. The position size can be determined based on the account size and the maximum acceptable loss for each trade. Additionally, finding the best setups involves creating a watchlist of potential stocks and index ETFs. These should be liquid assets with a range of $100 to $500. Liquidity can be determined by checking the option chain for weekly options and ensuring that the bid-ask spread is reasonable. By creating a watchlist and monitoring the indicators and levels mentioned earlier, you can identify the best setups for credit spreads trading.
Using the Information and Customizing the Strategy
The Ultimate Credit Spread Income Strategy provided in this article serves as a guide for identifying trade setups and managing credit spreads. However, it is important to customize the strategy according to your own trading style and risk tolerance. You can adjust the criteria for placing trades, the management styles for trades, and the position sizing to align with your individual goals and preferences. It is also recommended to practice the strategy with paper trading or in a demo account before committing real capital.
Building a Watchlist for Credit Spreads Trading
Building a watchlist is an essential step in the Ultimate Credit Spread Income Strategy. A watchlist consists of potential stocks and index ETFs that meet certain criteria, such as liquidity and price range. By creating a watchlist, you can easily monitor these assets and identify the best opportunities for credit spreads trading each day. The watchlist should be regularly reviewed and updated based on market conditions and changes in the assets’ characteristics.
Utilizing Technical Indicators for Trade Analysis
Technical indicators play a crucial role in analyzing trade setups for credit spreads. In the Ultimate Credit Spread Income Strategy, the stochastic oscillator is used to identify oversold or overbought conditions, which can indicate potential price reversals. Other technical indicators can also be used, such as moving averages, Bollinger Bands, or relative strength index (RSI). By utilizing technical indicators, you can enhance your trade analysis and increase the probability of successful credit spread trades.
Conclusion
In conclusion, the Ultimate Credit Spread Income Strategy is a powerful tool for traders with small trading accounts. By following the step-by-step instructions for identifying trade setups, considering the criteria for placing a trade, and managing trades effectively, you can generate income through credit spreads. Remember to customize the strategy to align with your own trading style and risk tolerance. Building a watchlist and utilizing technical indicators will help you identify the best opportunities in the market. Start incorporating the Ultimate Credit Spread Income Strategy into your trading routine and watch your small trading account grow.