I’ve been hearing a lot about credit spreads recently but I’m not clear on what they really are.
Some traders say they can provide steady income, but the whole idea feels confusing. Can someone explain how they work and when to use one?
Most online explanations seem too complicated.
Opening too many credit spreads during earnings week was a huge mistake. I thought I would collect easy premium.
TSLA wiped me out when it shot past my strikes. I lost $800 in one day due to the wild earnings volatility.
Now I stick to selling spreads on calm, low-vol stocks.
Cash comes in when you start, but your profits are limited.
Credit spreads let you collect premium while capping risk on both ends. The trade-off is your max profit gets capped too.
This strategy works best when you believe the stock will stay range-bound. Time decay works in your favor since you want both options to lose value.
Managing the trade is important. Many traders close at 25-50% profit instead of holding to expiration.
Credit spreads involve selling a higher-priced option and buying a lower-priced option with the same expiration.
Types include:
• Bull put spread - bullish outlook
• Bear call spread - bearish outlook
You receive cash upfront. Ideal outcome? Both options expire worthless, and you retain the premium.
Credit spreads are like selling insurance - you get paid upfront but you’re on the hook if things go sideways. Strike selection matters big time. Go too tight and you’ll barely collect anything. Go too wide and one wrong move wipes you out.
I trade these weekly with 30-45 day expirations. Always check IV before jumping in. High IV = better premium but way more risk. Paper trade this stuff first so you learn how the Greeks mess with your positions.
Start small until you get the hang of it. Managing risk beats chasing profits every single time.