Best Practices

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Credit Spreads

Best Practices

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

For today’s Best Practices, Tom and Tony discuss when and how we should implement vertical credit spreads into our trading. We trade Credit spreads because they provide a low-risk way to profit from selling options.

Credit spreads involve a position that uses both long and short options across a range of strikes. We look to apply this strategy when implied volatility is high. On the other hand, when IV is low we might look to trade Debit Spreads instead.

Some of the basic guidelines for credit spreads involve:

  • Collecting minimum credit equal to about 1/3 of the width of the strikes
  • Using out-of-the-money(OTM) options
  • Setting the short strike closer to the money
  • Switching to alternative strategies when the credit received is not high enough

By placing higher delta trades and following the rest of our rules, we can improve not only our Probability of Profit, but also our sensitivity to change in price.

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