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Credit Spreads

All About Credit Spreads - Definition, An Example, and How to Use

A credit spread comes about when you purchase one option and simultaneously sell an option (for the same underlying security, of course), and you end up with cash in your account.  In a credit spread, the amount that you collect by selling an option is greater than the amount you have to pay for the option that you buy.   

In a typical credit spread, you are hoping that both sides of your credit spread (i.e., the long option you bought and the short option you sold) will expire worthless, and you will be able to pocket all the cash you collected when you first sold the credit spread.

Just in case you are so lucky, and both options in your credit spread do not expire worthless, the broker will charge you a maintenance requirement which is equal to the maximum possible loss you could experience with your credit spread.  Usually, that works out to be the difference between the strike prices of the long and short option.  The maintenance requirement (i.e., the maximum loss possible) is reduced by the amount of cash you collect from the credit spread when you first placed it.

In similar fashion to all spreads, credit spreads are purchased to reduce risk.  The other side of the coin is that your maximum gain is limited. 

There are two greats feature of credit spreads.  First, if either or both of the options expire worthless, there is no commission to pay when the options expire.  Second, if you are trading in an account in which you have a margin loan on stock, the money you collect from the credit spread will offset some or all of the margin loan, and you will not pay interest.

An interesting side-note: If you sell stock short in a margin account, the cash is not generally applied to a margin loan.  Only cash received from the sale of an option credit spread will offset a margin loan.

 

Terry's Tips Stock Options Trading Blog

April 17, 2017

40% Possible in 2 Weeks With an Iron Condor?

Today’s idea involves an esoteric Exchange Traded Product (ETP) called SVXY. It is one of our favorite underlyings at Terry's Tips. Chances are, you don’t know very much about it, and I can’t help you much in this short note. But I will share a trade I made on this ETP this morning, and my thinking behind this trade.

Terry

40% Possible in 2 Weeks With an Iron Condor?

The best way to explain how SVXY works might be to explain that it is the inverse of VXX, the ETP that some people buy when they fear that the market is about to crash. Many articles have been published extolling the virtues of VXX as the ideal protection against a setback in the market. When the market falls, volatility (VIX) most always rises, and when VIX rises, VXX almost always does as well. It is not uncommon for VXX to double in value in a very short time when the market corrects.

The only problem with VXX is that in the long run, it is just about the worst equity that you could . . .

April 7, 2017

Trading Options Can be a Lifetime Learning Experience

I have been trading options just about every day the market is open for about 40 years, including some time on the floor of the CBOE. I have made large sums of money at times, and (sadly) have also lost money along the way. But the amazing thing about my experience is that I continue to learn things even after all these years.

Today I would like to talk about trading options with an analogy.

Terry

Trading Options Can be a Lifetime Learning Experience . . .

April 4, 2017

44% in 46 Days From a Play on ULTA?

I would like to share a trade that we made in one of our Terry's Tips portfolios today. By the way, we have 9 portfolios that we carry out for paying subscribers where they can see every trade (including commissions) as we make them. All of these portfolios have made positive gains so far in 2017, and the composite average has picked up 28.8% at the end of the first quarter. Not bad compared to conventional investment results.

Enjoy today’s offering.

Terry

44% in 46 Days From a Play on ULTA?

There is a lot to like about Ulta Salon, Cosmetics & Fragrance's (ULTA). It has been a darling of Wall Street this year, rising about 50%. It appears on IBD’s Top 50 list of momentum stocks. The Motley Fool guys have written over 300 articles on the company and include it in their top three beauty stocks. The company has a plan to add on 500 new stores, and they have exceeded earnings estimates every quarter for the past year.

The chart for the last year shows . . .

Making 36%

Making 36% – A Duffer's Guide to Breaking Par in the Market Every Year in Good Years and Bad

This book may not improve your golf game, but it might change your financial situation so that you will have more time for the greens and fairways (and sometimes the woods).

Learn why Dr. Allen believes that the 10K Strategy is less risky than owning stocks or mutual funds, and why it is especially appropriate for your IRA.

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