option credit spread

-

Hals Notebook



An option credit spread is a type of options trading strategy that involves the simultaneous purchase and sale of two options with the same expiration date but different strike prices. This strategy is used to generate income (credit) upfront, and it profits from the time decay of options.


Here's how it works:


Selecting the Options: You choose two options contracts, one to buy and one to sell. These options are typically of the same type (either both calls or both puts) and have the same expiration date.


Choosing Strike Prices: The options you select should have different strike prices. The option you sell (short option) will have a strike price closer to the current market price, while the option you buy (long option) will have a strike price further away.


Credit Received: When you sell the option (short option) with the lower strike price, you receive a credit for it. This credit is essentially the maximum profit potential of the spread.


Limited Risk: The long option with the higher strike price provides protection against potential losses. This means your maximum risk is limited to the difference between the strike prices minus the initial credit received.


Profit and Loss: The goal of an option credit spread is to profit from the passage of time and a decrease in the option's value (time decay). If the options expire worthless, you keep the initial credit as profit. If the market moves against your position, you may incur a loss, but it's limited to the predefined maximum risk.


Example of an Option Credit Spread:


Let's say you're bullish on stock XYZ, which is currently trading at $50 per share, and you expect it to stay above $45. You decide to implement a bullish put credit spread:


Sell to Open (Short Option): You sell one put option with a strike price of $45 for a credit of $2.

Buy to Open (Long Option): You simultaneously buy one put option with a strike price of $40, which costs you $1.

In this example, you've received a $2 credit by selling the $45 put and spent $1 to buy the $40 put. The maximum profit is the credit received ($2), and the maximum loss is the difference in strike prices minus the credit ($5 - $2 = $3).


If at expiration, the stock price is above $45, both options expire worthless, and you keep the $2 credit as profit. If the stock price drops below $45, your maximum loss is limited to $3.


Option credit spreads can be adjusted in terms of strike prices and expiration dates to fit your specific market outlook and risk tolerance. They are popular strategies for generating income while managing risk in options trading.

Comments

Post a Comment

Popular posts from this blog

Church’s Globe-Spanning Real-Estate Empire

-
Image
  Inside the Mormon Church’s Globe-Spanning Real-Estate Empire From Guam to Cape Verde, the Church of Jesus Christ of Latter-day Saints is using the financial cushion of its $100 billion investment portfolio to go on a temple-building spree A whistleblower revealed a few years ago that the Church of Jesus Christ of Latter-day Saints had an estimated $100 billion investment portfolio, and at the time, church officials called the holdings a rainy-day account. They now say the money also has provided a financial foundation that gives the Mormon Church confidence to construct more than 100 temples, from Cape Verde to Guam, a series of stone-clad monuments exhibiting the church’s vast and expanding wealth. In Pocatello, Idaho, a city of 56,000 in the rural southeastern corner of the state, a recently constructed temple stands at 71,125 square feet. Its polished limestone flooring was quarried in Bethlehem, the biblical birthplace of Jesus, and wood for its doors was imported from the Co...
Read more

tech companies

-
Image
 Good to know. The way tech companies continue to deliver ever-faster and more capable computers is undergoing a profound change—at the atomic level. Performance gains that were for decades accomplished mostly by shrinking the individual components on microchips—often described as Moore’s Law—are now increasingly the result of materials science, which is evolving faster than it has in decades. Santa Clara-based Applied Materials, founded in 1967, a year before Intel, is the biggest of the companies that are leading the way. It’s a change born of necessity. Chip makers are bumping up against a hard limit on how tiny the elements on chips can become, as some of their features can now be measured at the scale of just a few atoms. As a result, manipulating what materials are in these tiny machines, and how they’re connected to one another, has become a primary way that engineers can continue to make them faster and more capable. Applied Materials AMAT 0.72%increase; green up pointing t...
Read more