August 17, 2017

The Beauty of Credit Spreads

The beauty of out-of–the-money credit spreads is the fact that I can completely wrong in my directional assumption and still be profitable.

Even with the current extended rally into very overbought territory my credit spread positions are still profitable…none of my short strikes have been breached. And with almost every ETF I follow in an short-term overbought state I still expect to see a reprieve over the next few days because this is the most overbought we have seen many of these ETFs in years.

The plan remains the same, sell bear call spreads. When the highly-liquid ETFs I follow reach these type of levels the bread and butter trade is to begin selling out-of-the-money credit spreads. Since we are in an overbought state…bear call spreads apply. If we were in an extreme oversold state, bull put spreads would apply.

I hope this helps a few of you. I am keeping it short tonight as I have a few big days ahead of me and I really need to catch up on some z’s.

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  • iron_condor


    Just as an example, what bear call spread would you sell right now on IWM?

    Thx, Steve

  • acrowder

    I can’t really give any personal advice, but I would look to a strike with an 80 to 85% chance of success. Of course, duration must be considered. I prefer to sell options with 25 to 56 left until expiration, preferably somewhere in between.

  • iron_condor

    Of course, not looking for personal advice…time frame was what I was interested in. I trade very similarly to you and experience has taught me that duration is a major component of repeatable success. Like many traders, I got caught up in the lure of the weekly options and their “accelerated time decay” only to learn the hard way that they don’t provide the necessary duration to allow the probabilities and mean-reversion to work out. Is your mean-reversion indicator proprietary?
    Thx, Steve