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Initiating & Managing Credit Spreads

Market Measures

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

In this Market Measure segment, Tom and Tony discuss how they like to set up and manage credit spreads in SPY.

Vertical Spreads consist of one long option and one short option on either the Call or Put side. There are 4 types of Vertical Spreads, separated into two categories depending on the Implied Volatility environment: credit spread and debit spread. Credit spreads are usually positioned with a short option just Out-the-Money (OTM) and a long option further OTM.

In a study conducted by the Research Team, they looked at SPY (S&P 500 ETF) from 2005 to present. Using the 45 DTE options, our team sold credit spreads with the following setup:

  • Short 40 delta put (call)
  • Long 20 delta put (call)

From those occurrences, tastytrade analyzed managing the spreads at 50% of credit received.

When looking at the average P/L per day, managing credit spreads increased win rates, especially in high IVR environments. It was also easier to get near the optimal “⅓ the width of the strikes” target that we typically aim for on vertical spread entry.

In conclusion, Tom and Tony state why they prefer using credit spreads in high IVR and debit spreads in low IVR. They tend to sell put spreads into weakness and call spreads into strength. High IV also presents great opportunity for credit spreads when traders have a strong directional.

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