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To the general public, making a profit consistently from the stock market seems like a myth. Due to disadvantageous conditions weathered by retail investors, making a profit is decidedly an uphill climb, let alone achieving it on a consistent basis. The nature of the stock market is that if someone gains, it is always at another’s loss. Knowingly or not, the naïve and optimistic retail traders and investors are going against financial professionals and seasoned traders. Thus, it is not surprising most retail investors end up losing their hard-earned money.
Now imagine an investment strategy that allows you to profit whether your stock moves higher, lower or sideways (which is pretty much any direction). Is it too good to be true? No, it is called the credit spread. Credit spread is an Options Trading Strategy which combines simultaneous selling and buying of 2 different strike prices for the same underlying asset. The price of the option sold is greater than the price of the option bought, resulting in a net credit for the Spread Seller. Being one of the lesser-known strategies employed by options trader, credit spread may be written into a relatively low risk investment technique.
Credit spreads are categorized into either bullish or bearish spreads. The bull spread is known as the Bull Put Spread while the bear spread is called the Bear Call Spread.
Statistically, 80% of all options expire with no value, so it has always been a race against time for options traders. If you are an options buyer who likes to buy out-of-money strikes, this means is that all your money in the trade could end up in smoke if the underlying asset does not move as expected. Therefore by taking advantage of time decay in options prices, credit spread will instead benefit you as you progress nearer to expiration.
For example, if we wrote a Bull Put Spread, even if the stock moved further down (so long as it doesn’t fall beneath the strike price we sold our puts at) we’d still be able to profit.
Therefore, it is evident that credit spreads are powerful tools in the investment arena when used correctly. If carefully written, credit spreads are able to cushion our bad judgments and more wonderfully enable us to profit at the same time.
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