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Credit Spreads | How to Select Strike Prices (Options Trading Tips)
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- Опубликовано: 15 авг 2024
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With so many strike prices to choose from, how might you select strike prices when trading credit spreads?
Two of the four vertical spreads are considered credit spreads because you collect option premium when you enter the trade. The trade is entered for a "credit."
The two credit spreads are the bear call spread, and bull put spread.
In this video, we'll cover two common methods for choosing strike prices when trading credit spreads, as well as compare the pros and cons of each approach.
While there's no single "optimal" way to choose strike prices, this video should help guide you towards more strategic strike price selection when selling call or put spreads. Additionally, you'll get an introduction to using delta when selecting strikes. tastytrade, Inc. (“tastytrade”) has entered into a Marketing Agreement with Project Finance(Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’ brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade and/or any of its affiliated companies. Neither tastytrade nor any of its affiliated companies is responsible for the privacy practices of Marketing Agent or this website. tastytrade does not warrant the accuracy or content of the products or services offered by Marketing Agent or this website. Marketing Agent is independent and is not an affiliate of tastytrade.
✅ New to options trading? Master the essential options trading concepts with the FREE Options Trading for Beginners PDF and email course: geni.us/options-trading-pdf
What a brilliant explanation, Thank you so much, You are being very generous by posting it for free, keep the good work going. Thank you again.
Thanks for the awesome comment! I appreciate it.
-Chris
Love watching these videos and thinking thing like “holy shit aapl used to trade at 158”
Yeah me too!
Yeah now it’s at 127 post split 😂
@@X2Jason 🤣🤣🤣
Been split many times
Thank you very much.... through your series of videos, I am learning a great deal about option trading. This particular educational video is very useful, as it detail when and how best to use such an option strategy. I look forward to viewing more of these type of videos
really good explanation- look forward to viewing the rest of your tutorials
Thank you!
Finally a video that I I understood
Glad to hear it!
Excellent video
Thank you very much!
Thanks for the video.
You are welcome!
Thank you so much for your videos. Definitely been a big help & a big brother to me. The way you explain makes it so clear. Much love
Thanks for watching! I'm glad the videos have been helpful for you.
How does liquidity in deep OTM options? If the prices aggresively move in our favor, would that create a problem to square off those positions?
Remember, trading for gains should be boring and predictable
you're absolutely right! Successful trading is often not sexy.
Excellent summary, thanks!
You're welcome. Thanks for watching!
Great video Chris. I really learnt alot watching this & your explanation is very clear. Great job.
My bad, it was on my end, not yours. I changed the quality and now it's great as well as your explanation.
Thanks again
Thanks for clarifying with your comment!
Fantastic explanation. I now understand why.
how better trader are you now? i mean in last 3 months?
I love doing this strategy. Thanks for the explaining it so well!
You're welcome, thanks for watching!
I don’t look at it this way, I look at odds of success vs the risk to reward. Great explanation though.
I was like wait a second. If your spread is further out of the money, then that lowers the probability of the stock going against it. I see the risk reward equation as a separate factor. I'm will to take a not so good risk reward deal if I'm gonna win 90% of the time.
@@ernestenockdavis415 I thought the same too when I first started selling spreads with 90% chance of staying out of the money. That was until that one trade went against me and wiped out all of profits from the 90% trades.
Great explanation Chris! I definitely understand alot better now.
Thank you!
You make it really easy to understand thanks...
Thanks Chris for the awesome explanation. Keep up the great work!
Thank you!
Delta does not estimate any probabilities of being in-the-money.
Delta is the value the option will increase or decrease for every $1 the asset increases or decreases.
If the delta is 0.27, and the underlying goes up by $1, the option will go up $0.27.
The probability of expiring in-the-money will likely be near that number expressed as a percentage, such as 30%, or 26%, but the delta value only means how much the price moves per $1 of movement in the asset.
That's correct. I may have just mentioned the probability aspect since this video is on strike price selection.
It seems that a lot of people think it is both of those things in the world of options. I first read of it defined as you define it. But then I noticed that, in TradeStation at least, the delta + the prob OTM always sum to 1.0 - e.g. if delta is called out as .18, prob OTM for that option will be 82% *every time*. I would still like to have a better understanding - I don't see how one number can represent two things simultaneously.
What about R:R for ATM spreads
I didn't know max loss was simply the spread minus the premium, thank you.
HI THIS CAN WE USE FOR IN DAY TRADING TOO?
What about stop losses, were I may put the stop losses in both cases ?
Good video, but I have a question..how can we calculate the right price of credit spread?
When we buy a vertical spread for a credit, how we can know if the price is a good price or not? Are there some manners to calculate the price?
Thanks
Stay amazing
Great video, Very good explanations thank you!
You're welcome! Thanks for leaving a comment!
Great video. Are they any backtest showing that selling OTM spreads has a higher probability and also higher profitability while buying ITM spreads are better for the exact same reason?
Finally a video using actually symbols & strike prices. I hate all that xyz bullshit 🤣
Thanks for the comment, Taloot! I agree, which is exactly why I always try to use real symbols.
-Chris
Thanks you’re good and explained very well. I like you do another video of credit spread with more real time trading examples. Also can you give an explanation as to how to play for only for the premium?
Is the best way to choose $5 spread difference?
I take it this strategy is for spreads that will expire worthless at expiration, right? Doesn’t IV and IV rank play any factors when entering?
Question: Is the reason why you didn't sell an ATM 155 PUT/150 PUT is that its more likely to breach the 155 verses the 150 PUT?
Hi Kimberly!
The trades in the presentation are just examples to show the difference in premium collected and risk/reward when choosing different strike prices and using different spread widths.
What you said is correct, though. Selling a put option at a lower strike price means the put has a lower probability of expiring in-the-money relative to the higher-strike put.
However, you'll collect less for selling a further out-of-the-money option simply because it does have a lower chance of expiring in-the-money (and therefore a lower chance of being valuable at expiration).
I hope this helps!
-Chris
Very helpful! Thank you for this content. I subbed
thanks for the video but it would have been better to use technicals such as delta or stand deviation channels to decide the strike prices instead of trader believes .... in fact i'm looking for more details on such an approach. If you ever decide to make a video on it, please let me know.
Very informative Video,thanks for sharing.
You're welcome, Parag! Thanks for the comment.
I'm new to options and my question with credit spreads is, if you have 44 days to expiration do you have to wait for the expiration date or can you close it out earlier? And if you can close it out earlier what exactly happens? Thanks and sorry if this is a dumb question
Whenever you're trading options you can open or close positions at any time when the market is open. So, even if you're trading an option or spread with 44 days to expiration, you can still close the trade at any time before the options expire.
When you close the position early, you'll simply lock in any profits or losses you had at the time.
For example, if you sell a spread for $1.00 and buy it back (close the trade) for $1.25, you'll end up closing the position when the loss is $0.25 in option terms or $25 in actual P/L (per spread).
Thanks for the answer. I'm looking into weekly options. Do you have any videos on that? Thanks again
At this time we don't have any videos covering weekly options. Typically, any studies we do will use options with 30-90 days to expiration.
Very helpful. Thanks
You're welcome!
Great video
Soooo wouldnt it seem logical to use this strategy on stocks that have a very low beta ie. priec movement?? Maybe im not understanding something here.
Subscribe!!!! I been looking for videos about spreads like this a long time brotha keep up the quality work.. I’m for sure telling my other buddies to subscribe to this account for sure there into options.
Thanks, Richy!
Really glad you're liking the videos.
-Chris
thanks sir
You're welcome! Thanks for the comment!
Great video. Thanks. What trading platform is that?
Think or swim
I don't understand why you have a higher when you sell a further out of the MONEY option.
Chances are greater that I don't loose me premium at experation.
what is the name of the strategy when you sell a covered call and buy a cash covered put--thus creating a range for the stock to move within
That strategy would be the 'collar'.
Here's a link to our video on the collar strategy: ruclips.net/video/NgpLxQChNmQ/видео.html
I hope this helps!
-Chris
Blue Skies how often do you use this now?
selling puts is a no brainer...you collect the premium and you know the risk off top not only that but take some profit before expiration.....safe to say selling puts is a really good way to go.
Hi I'm new to options trading so I have a doubt please. Can I trade options without technical charts and without any indicators? Pls give a explanation and I want options videos links pls share with me thank you.
No, you can’t that would be plain stupid
Have I heard you say in the past that you don't use technical analysis for your options trading?
Not extensively
@@projectfinance So you primarily use...Delta?
Should your second strike price you pick always be the one next to your first strike price?
Not necessarily. The wider the spread, the higher the prem collected but higher the potential loss. So how wide u choose depends on the risk/return u aiming for and also your own risk profile. Of course the liquidity at that chosen strike also matters.
Very good info. I watch another youtuber video about choosing strike prices and they had a formula. Credit = width strike x prob. of ITM. Credit has to be a certain value for the trade to make sense. What do you think? Thanks.
The credit received on a credit spread is reflective of the spread's probability of making money. I agree that collecting too little doesn't make sense because commissions will eat into most/all of the profits if you're only collecting a few pennies.
But, just because you collect more premium for a spread, it doesn't mean it's better.
If I look at a $10-wide spread on AAPL and the value of the spread is $3.00, it doesn't mean that selling a $10-wide spread that is closer to the stock price for $5.00 is better.
The price is reflective of the spread's probability of making money. The $3.00 spread in the above example has a higher chance of making money than the $5.00 spread because the $3.00 spread has $300 of profit potential and $700 of loss potential, while the $5.00 spread has $500 of profit potential and $500 of loss potential.
@@projectfinance ok, thanks. Im still learning.
can you do credit spreads on weeklys?
Yes
Can you do a ITM Credit spreads?
Sure. This is a low probability trade though. You could play this if you think the stock will go down. A $100 current priced stock could have a spread $95/$98. You would need the price to go below the $95 strike. You will likely get $3 or $3.5 for this spread risking $2 or $1.50.
@@thonatim5321 I guess it would depend because I'm position trader. I just recently gotten back into options. I've been trading stocks and Forex for the past six years and gotten really good at it. So I'm taking another look at options to take advantage what I know.
@@Troyson04 ITM options are very low probability (under 30%). In my opinion, it is best to sell way out of the money (delta 10 or under), wait for the time decay and get paid. This is not sexy or exciting, kind of like watching paint dry. But it will pay you over the long run.
I typically trade 0 DTE SPX Iron Condors at a 10 delta. I open my position about 10am and close at 2pm. I do this mechanically not emotionally. I typically get $.90 per contract and I buy back at $.15 or $.20 so my net profit is about $.70. Then I trade 20 or 30 contracts so my daily profit is $1500 ~ $2000 every M, W, F.
I also hold some small positions out to 21 DTE and 45 DTE only to catch theta decay.
There are some days where the market does not cooperate. Those days are fun because it gets interesting. I will then adjust the trade and play for a tie (no profit or loss)
@@thonatim5321 yeah I tend to trade longer positions. It's just the trading style I prefer and feel more comfortable with and is most profitable for me. Curly right now I'm just doing vertical spreads after starting point I do have interest in the iron condor. But as always I take one step at a time.
How long have you been trading for and do you have zoom? Maybe we can have a zoom chat sometime
I wonder if this is more safer than trading through a Forex formula/ currency market 🤓??
great video, but with the black background I can't really see anything, it's more like a podcast.
Would you rather sell a few Spreads with longer time to expiration or more weekly spreads?
It's a balancing act. The short dated option may reduce your risk due to less volatility in price change but premium are much less.
Sorry, not the best explanation. A lot of switching back and fourth on screens. But maybe that's just me. Your other videos are outstanding
Delta 13:04
are you color blind thats a purple line? at 14:37 you said to sell OTM for more risk, and closer to ATM for less risk? Isn't it the opposite?
I'm not color blind, but we all see colors a bit differently!
If you sell a further OTM spread, you will have less profit potential and more loss potential compared to selling an ATM spread (given the spread widths are the same).
He is referring to risk as magnitude of maximum loss, not risk as likelihood of loss. It took me a minute to figure that out. To me, the riskiness of a trade is a function of both magnitude of downside and likelihood of downside, but that is not how it is commonly expressed, I guess.
It seems he is the only one who understands what is going on. The graphic is so small and moving so fast.
Elsa
talks way too fast, slow down
You can control youtube playback speed under Settings/Speed........
wow, I did not know that feature. Thanks for letting us know. its very useful
Watch it more than once or slow it down
thanks sir