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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

September 23, 2018

Consider Buying the Post-Earnings Dip in Adobe Systems (ADBE)

This week we are looking at another of the Investor’s Business Daily (IBD) Top 50 List companies.  We use this list in one of our options portfolios to spot outperforming stocks and place option spreads that take advantage of the momentum.

Terry

Consider Buying the Post-Earnings Dip in Adobe Systems (ADBE)

Adobe’s stock price has seen a steady rise over the last few years, and from both a technical and fundamental standpoint, there is a strong case to be made that it will continue.  These following two articles discuss the recent earnings report and where the stock may go from here - Adobe: Stock Marches Forward With Another Record Quarter and Should You Buy Adobe Systems at Its All-Time High?.  As well, there have been several price target upgrades as of late and a few of the more bullish analysts think the stock can even cross above the $300 price point.

September 15, 2018

Has Netflix (NFLX) Found A Bottom?

This week we are looking at another of the Investor’s Business Daily (IBD) Top 50 List companies.  We use this list in one of our options portfolios to spot outperforming stocks and place option spreads that take advantage of the momentum.  The actual portfolio that Terry’s Tips carries out with these plays we send to you each week has gained 98.5% so far this year.  We started out 2018 with $5000 in the portfolio and withdrew that amount in June so that subscribers who mirrored it in their own account or had trades executed for them with the free Auto-Trade service at thinkorswim have almost $5000 left and it is entirely profits for them.

Terry

Has Netflix (NFLX) Found A Bottom?

Despite a recent correction, market sentiment towards Netflix stock remains positive while certain analysts see a notable upside from current levels.  Take a look at this recent article posted on Investopedia that states a 30% rally could be in the cards for NFLX and the following article posted on Seeking Alpha that builds a strong case for remaining bullish.

September 10, 2018

Mastercard (MA) Expected to Continue the Steady Rise

This week we are looking at another of the Investor’s Business Daily (IBD) Top 50 List companies.  We use this list in one of our options portfolios to spot outperforming stocks and place option spreads that take advantage of the momentum.

The actual Terry’s Tips portfolio which trades essentially every weekly play that we send to you has gained 91% so far this year (after paying all commissions, of course).  The portfolio started out the year with $5000, and on June 15, 2018, we withdrew $5000 from the portfolio so that all subscribers who followed it would all their money back and be playing with pure profits.  The portfolio is now worth $4552.

I especially like this week’s idea because I like Mastercard and believe that last week’s weakness in the stock price was unwarranted.  Enjoy the full report below.

Terry

Mastercard (MA) Expected to Continue the Steady Rise

Among the list of IBD Top 50 companies Mastercard stands out as its uptrend is far steadier than any of the other companies.  These two articles suggest the stock will continue the trend – Mastercard’s Stock May Have Big Gains Ahead and Mastercard’s Strategy Suggests Further Stock Price Growth Ahead After 60% Rise.

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TastyWorks

Tastyworks is a new brokerage firm from the brains behind tastytrade and it is our top choice of options-friendly brokers. Their commission rates are extremely competitive - options trades are only $1 per contract to open and $0 commission to close (all options trades incur a clearing fee of $0.10 per contract). The tastyworks trading platform quickly became our favorite platform for options trading and it keeps getting better with new features released each week. Terry uses tastyworks and loves everything about them!

TD Ameritrade

This Chicago brokerage firm with the unlikely name thinkorswim, Inc. by TD Ameritrade is considered by many to be the best option-friendly broker. For openers, they have extremely good analytic software and their option trading platform is exceptional. Thinkorswim Mobile has been called the best mobile app in the industry. In 2017, TD Ameritrade received 4 stars out of 5 in the annual Barron`s* Best Online Brokers Survey. TD Ameritrade was tops as an online broker for long-term investors and for novices. The company is the only broker that receives the highest 5.0 score for research amenities among all firms participated in the ranking last year.

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