One way to short premium is through the use of vertical spreads. This is a position that uses both long and short options across a range of strikes.
In this segment Tom and Tony address what we need to know about, specifically addressing spreads that are traded for a credit.
Here are a few basic guidelines:
- Collect minimum credit equal to about ⅓ of the width of the strikes
- Use OTM options
- The short strike is closer to-the-money
- If the credit is not high enough, consider alternate strategies
If you have a tastybite account or are just looking to review the mechanics of credit vertical spreads, check out this segment!