Option Spreads

Credit Spreads

Credit spreads are a great way to place a bet on where the market will not go. Most of the time it is easier to hold a credit spread with time decay than trading in choppy market conditions. We typically trade SPX spreads that are 5-10 wide, ATM + ITM.

Call Credit Spread – Strategy where you sell a call at a lower strike price while simultaneously buy a call with a higher strike price. Selling this spread will result in a net credit to your account. The goal is to purchase the spread back at a cheaper price as the market goes down. This is a bearish bet.

Put Credit Spread – Strategy where you sell a put at a higher strike price while simultaneously buy a put with a lower strike price. Selling this spread will result in a net credit to your account. The goal is to purchase the spread back at a cheaper price as the market goes up. This is a bullish bet.

Debit Spreads

Debit spreads are a great way to take a direction bet with up-front known max risk and max profit. We typically use debit spreads when we are swing trading for 2-4 days.

Call Debit Spread- Strategy where you buy a call at the lower strike price while simultaneously sell a call at a higher strike price. This is a bullish bet.

Put Debit Spread- Strategy where you buy a put at the higher strike price while simultaneously sell a put at the lower strike price. This is a bearish bet.

ATM + ITM + OTM

ATM – At the money option contracts are the contract with the strike price at current market price. If SPX is at 5000 and I buy a 5000 call, I am buying it at the money.

ITM – In the money option contracts have passed the option strike price. If SPX is at 5000 and I buy a 4990 call, I am buying a call $10 in the money.

OTM – Out of the money options have not yet passed the strike price. If SPX is at 5000 and I buy a 5010 call, I am buying a call $10 out of the money.

ITM options premiums are higher than ATM premiums. When selling credit spreads ITM strategies can produce outstanding results.

OTM debit spreads are great way to hold a directional bet over one trading session.

OTM is also used in the lotto trade for a cheap directional bet with defined risk.