Date: 12/19/2022
Author: Chris Hood
What I enjoy most about our live TradeCommand room is that it’s not just about providing trades.
Our subscribers get an options education.
Of course, I provide trades – everything from basic long calls or puts to more advanced strategies like iron condors and butterflies.
But along with the trades comes the reasoning behind the set-ups and how to manage them.
It’s an unbeatable combination.
I want to discuss something that came up during a discussion in the room last week. How to turn a losing credit spread into a winner.
This technique can maximize your profits if you enjoy trading spreads.
Corey Snyder has already closed 250 winners on this stock in the last 12 months…
And on December 20th, during the Dragnet Wealth Summit – he’s going to share the ticker with you, plus how you could apply this strategy to boost your income by an extra $1,000 a week.
Click this link right here to RSVP now.
We’ll use bull put credit spreads as an example, but this also applies to bear call credit spreads.
In a bull put spread, you sell a put below at or below the strike price of the stock, then purchase another put deeper in the money for the same expiration.
Unlike selling a naked put, where you take on exceptional risk if the trade moves against you, the credit spread is much less risky.
Your risk is limited to the price difference between the two options minus the credit received.
Profits come quickly if the stock rises.
However, even if the underlying stock price stays the same or dips down but doesn’t fall lower than your short put strike price, you’ll still win.
While these tend to have a higher win percentage than purely directional plays like calls and puts, sometimes they don’t work out.
Let’s examine what happens when the trade moves against you.
Both puts gain in value, but short put gains value faster, creating a loss if the stock price breaches your short strike.
Many traders close the trade when this happens and take the loss.
There’s nothing wrong with that strategy. However, you could sometimes break even on the trade or make a lot of money with one simple adjustment.
If your technical indicators suggest a significant momentum shift to the downside, you can buy back the short put for a loss and hold the long put.
Now, rather than a losing spread, you own a long put gaining value as the stock falls.
If it drops far enough and fast enough, the gains on the long put can easily offset the minor loss you took when you bought back the short.
You’ve just converted a bullish trade into a bearish one.
I use this technique often when my signals suggest the price drop will be substantial.
A continuation of the bearish momentum can often net you a gain on what would otherwise be a losing trade.
Sometimes the move won’t happen fast or soon enough to create a profitable trade.
But you can still earn back some of your losses from closing the short and either break even or lose less.
Options allow fantastic flexibility. As you gain experience and skill with the basics, start learning how to up your profits with these more advanced adjustments.
Cheers,
Chris Hood
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