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Index Credit Spread Trading
I am an active trader of option credit spreads on the SPX, NDX and RUT broad based stock indexes. I am very conservative and only enter into trades that have a very high probability of being profitable. I write OTM Bull Put Spreads first. During months when the market is moving sideways or slightly up, I add OTM Bear Call Spreads to create Iron Condors. My goal is to collect premium month to month. I want all my spread trades to expire worthless.
I like trading the Indexes because they are not subject to the same wild price swings as individual stock. It is also easier to make risk management adjustments on Index trades than say GOOG which can change in value quickly on some bad news.
An option credit spread is a limited risk option trade involving the simultaneous purchase and sale of two differing option contracts on the same Index, i.e. the SPX. This produces an immediate cash credit in your trading account. A profit is realized in a credit spread position if the index moves in the direction anticipated, remains the same and even if under appropriate circumstances the index moves adversely to your position.
Benefits of Index Credit Spread Trading
Index credit spread trades have a 90% probability of expiring worthless when filled.
These credit spread trades can profit in any type of market. Markets today are more likely to trend sideways, or move slightly higher or lower month to month.
The majority of time you just make a trade, collect your credit and wait for the next month. This is not a day trading system. There is no need to monitor the market and your active trades all day long in front of the computer screen. In fact it's really a very boring trading system.
Paper trading is the best way to learn this option strategy. It's all free with CBOEs new Virtual Trading system.
The SPX, NDX and RUT Indexes are not subject to the same wild swings as individual stocks.
With Iron Condor trades you get double the credit but only have one margin side at risk.
You want your credit spread trades to expire worthless but you can always buy them back for way less than you sold them for.
Your trading capital is only used to support margin requirements. Most option brokers allow you to invest your trading capital and use it as collateral for spread trading. This way you can earn 2 returns with the same capital.
Please visit my website. You can see my actual performance results of all trades for the last 12 months and the current YTD return which is amazing. My website is over 25 pages and full of content that covers all aspects of this trading strategy.
About the Author: Brad Griffin (firstname.lastname@example.org) is an Accountant and CPA and has been investing in the U.S Stock Market for 10 years and the options market for the past 5 years. I am now sharing my knowledge and success trading options at my website http://www.indexspreadoptionstrading.com.