It’s fairly obvious that the purpose of trading options is to make a profit. If you’re not making a profit, then you’re either wasting your time by breaking even or, worse yet, you’re taking a loss. Fortunately, in the options market, there are some simple strategies that can help to ensure that you turn a profit. Using credit spreads can be a great way to hedge your bets and make sure that you stand a greater chance of making a profit. They are conservative strategies, so you’re not taking a big risk in order to make big money with a credit spread.
The basic premise of using credit spreads is that by purchasing one option and selling another in the same class, but for different strike prices, you can receive a net credit for entering into the position. Ultimately, the goal is for the options to expire or “narrow” for a profit. By wisely negotiating the strike prices, you can even stand to make more of a profit than just the option contract premiums. It takes some savvy, and the more you do it, the more adept you’ll get at turning a profit from the use of credit spreads in the options market.
It helps to see how using credit spreads work if you can see an example. So say that you are purchasing an options contract for a stock with a strike price of $100. You can purchase that contract for $10. Then, let’s say that you sell an options contract for that same stock with a strike price of $125. You sell that contract for $25. You’ve made a net profit of $15, and if both of your contracts expire without being exercised, you’ve made a profit of $15 per share. If each contract was for 100 shares, then you’ve made a profit of $1,500.
Using credit spreads is a very simple and easy way to work the options market to your benefit. It’s a very conservative strategy, and it works most of the time, as long as you’re making wise options contracts. It’s not the kind of strategy that’s going to make a killing for you in the long run, but it’s a good enough strategy to start with so that you can get a better feel for the market, how it works, and how to spot and analyze trends. And if you can turn a profit while you learn the ropes, that’s just a bonus.