Date: 12/12/2022
Author: Chris Hood
Everyone (including me) loves getting the massive profits that come with getting in early on a huge trend.
If you get the direction right, a call or put will boost your P/L like nothing else.
But there’s a problem with purely directional plays as a mainstay of your trading.
The win rates aren’t high.
Regardless of your indicators or skill, you’ll be fortunate to average higher than a 60% win rate.
Anything above 50% is exceptional.
But trading a ticker stuck in a well-defined range between support and resistance can be a goldmine for option sellers.
To clarify, I’m talking about bear call credit spreads, bull put credit spreads, and iron condors.
We’ve been making a fortune on these in the TradeCommand live room lately, so let’s look at how they work.
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The volatility has been a windfall for us – 293.2% and 43.6% on SPX in under a week.
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Though most of our profits have come from options on the cash-settled SPX index, I’ll use the consumer discretionary index XLY to illustrate.
Take a look at the XLY daily chart for the past few weeks.
It’s like watching a game of ping pong.
Just for a refresher, a bull put spread is when you sell a short put and buy another one for the same expiration that is deeper in the money.
You receive a credit to your account and get to keep all of it as long as the stock price stays above your short strike.
A bear call spread is precisely the opposite.
Sell one call option and buy another further out of the money.
As a stock price rises calls gain value. Selling your credit spread as the price approaches resistance (the red line) means you’ll collect the most premium.
If you’d sold your spread at or near the first arrow, it would have closed quickly.
You’d profit from both time decay and the drop in stock price.
You’d sell the put spread just as it touched the support level (green line). This way, you take advantage of the increased premium on puts.
Again, the trade should have closed rather quickly.
Keep doing this as long as the stock respects the levels and stays rangebound.
There are iron condors for those wanting to collect premiums simultaneously on both sides.
Despite the exotic-sounding name, an iron condor sells both a bear call spread and bull put spread simultaneously.
If the stock stays between your short call and put until expiration (or until you take profits early), you’re collecting profits off both sides.
And a loss on one side will be partially offset by the win on the other, reducing your risk.
The benefit of credit spread trading is the high win rate.
Paying close attention to your signals and levels can provide a consistent and stable source of “income” into your account.
If you aren’t using these now, then you’re missing out.
Even if you prefer directional trading with calls, puts, or debit spreads, keeping some of these spreads on the books is always a good idea.
Give it a try, and thank me later.
Cheers,
Chris Hood
PS – If you’re struggling in this bear market, let the Trade Command Network put you on the path to profits. How does a 393% gain on SPX in less than a week sound? Get in on the action by clicking the link here.
