Strategy Mastery | Credit Spreads 📈

Name: Strategy Mastery | Credit Spreads 📈
Uploaded: 2022-06-09T23:03:32.000Z
Duration: 2 h 12 min 19 s

Introduction

In this section, Tony Zhang introduces the topic of credit spreads and explains what will be covered in the webinar.

Tony Zhang is the Chief Strategy Officer at Options Play.

The topic of the webinar is credit spreads.

The goal is to provide an understanding of credit spreads and how to maximize profitability with them.

This session is for education and demonstration purposes only and not a solicitation or recommendation to buy or sell any specific securities.

Understanding Credit Spreads

In this section, Tony Zhang provides an overview of credit spreads, their potential outcomes, risks, rewards, and how they can provide an edge.

Credit spreads are discussed as a popular strategy for many investors.

A bearish trading example is used due to being in a bear market.

Potential outcomes, risks, and rewards are discussed.

Credit spreads are explained as providing an edge.

Real-Time Trading Signals

In this section, real-time trading signals generated by Options Play are shown as examples of why specific opportunities are better than others.

Real signal examples are provided to show why certain opportunities are better than others.

Best Practices for Selling Credit Spreads

In this section, Tony Zhang discusses best practices for sustainably selling credit spreads for income.

Three steps to growing your account sustainably with credit spreads are presented.

Step one focuses on gaining consistency and preventing blow-ups.

Winning more than 50% of your trades is emphasized as important for optimizing and learning more about the strategy.

Introduction to Bearish Credit Spread

In this section, the speaker introduces the concept of a bearish credit spread and explains how it can be used to limit risk while still maximizing premium collection.

Understanding the Strategy

Traders often blow up their accounts due to lack of discipline in position sizing.

A bearish credit spread involves selling an at-the-money call option while also buying a higher strike call option to limit risk.

By combining these two options, traders can collect a net credit for the trade and cap their potential losses.

The distance between the two strike prices defines the maximum risk and reward for the trade.

Conclusion

In this section, the speaker summarizes key takeaways from the discussion on bearish credit spreads.

Key Takeaways

The distance between strike prices determines maximum risk and reward.

Max profit is limited to premium collected, while max loss is limited by vertical width minus premium collected.

Bearish credit spreads are a useful strategy for limiting risk while still collecting premiums.

Understanding a Bearish Credit Spread

In this section, the speaker explains the key numbers to understand when trading a bearish credit spread.

Key Numbers

The break-even price is $308, which is the strike price plus $8.16 buffer.

The maximum profit is $816 and the maximum loss is $1,184.

If the stock declines below $308 at expiration date, you can make a full profit of $816.

Performance of a Bearish Credit Spread

In this section, the speaker explains how a bearish credit spread performs in different market scenarios.

Market Scenarios

If the stock moves lower or stays at its current level, you can still make a full profit of $816.

Even if you get the directional view wrong and the stock moves higher but stays below the break-even price of $316.16, you can still turn a profit on this trade.

If the stock lands between $308 and $316.16 by expiration date, you will have some profit between 0 and $816.

Only if the stock exceeds the upper strike price of $328 do you lose your full amount of $1,184.

Conclusion

In this section, the speaker concludes by summarizing why selling option strategies like bearish credit spreads are popular among traders.

Selling Option Strategies

Many traders find it difficult to gauge where markets are going to go so they prefer selling option strategies that will be profitable in many scenarios.

A bearish credit spread is considered forgiving because even if you get your directional view wrong or if nothing happens with the stock price movement-wise for an extended period of time, there's still potential for profitability.

Credit Spread Strategy

In this section, the speaker explains why they chose a credit spread strategy and how to choose strike prices.

Choosing Expiration Date

The optimal expiration date for a credit spread is 45 days to expiration.

This is because it maximizes time decay and minimizes gamma, which works against us in option selling strategies.

As we get closer to expiration, theta gets larger but so does gamma. The sweet spot of expiration dates with respect to credit spreads is 45 days.

Choosing Strike Prices

Always sell an at-the-money call or put. Calls are for bearish strategies, puts are for bullish strategies.

In this case, since the speaker has a bearish view on QS, they sold the call vertical spread and sold the at-the-money call option (308).

The second strike price (328) was chosen because it's the 25 delta.

Collecting Premium

Collect at least one-third of the vertical width between the two strike prices. In this case, that's $6.60.

The most important part of any strategy is collecting enough premium. They collected $8.16 in this case.

Using Options Play Platform

In this section, the speaker explains how to use the Options Play platform to automate credit spread selection.

High Implied Volatility Strategy

The Options Play platform automatically selects the optimal credit spread based on best practices.

Regardless of whether you're bullish or bearish, the platform will design the optimal credit spread for you based on high implied volatility.

Collecting Premium

After selecting a strategy, make sure to collect at least one-third of the vertical width between the two strike prices.

If you're not collecting enough premium (at least one-third of the vertical width), it's not worth trading that particular credit spread.

Example with Apple

Even if you're bullish on Apple, don't sell a put credit spread if you're not collecting at least one-third of the vertical width.

Understanding Risk-Reward Ratio in Credit Spreads

In this section, the speaker explains the importance of risk-reward ratio in credit spreads and how to find opportunities that collect more than one-third of the width.

Importance of Risk-Reward Ratio

The distance between two strike prices is an important concept in credit spreads.

Whatever you collect in income, the rest is your risk.

For every one dollar you can potentially make, you are risking two dollars on the back of that.

To break even on a specific strategy, you need to win 67% of the time.

Minimum Requirement for Selling a Credit Spread

Getting yourself to break even is a good starting point for most traders.

The minimum requirement for selling a credit spread is getting yourself to break even.

Finding Opportunities with More Than One-Third Width Collection

By finding credit spreads that collect more than one-third of the vertical width, traders can improve from being a break-even trader to being profitable.

If able to collect 40% of the vertical width instead of one-third, traders can reduce their risk while making more profit.

Real-time credit spread opportunity reports published by Options Play every hour help scan and find only credit spreads that collect substantially more than 33 percent of the width.

Introduction to Credit Spread Report

In this section, the speaker introduces the Credit Spread Report and explains how it works.

How the Credit Spread Report Works

The report finds credit spreads that generate more than 33% of the vertical width.

It filters based on liquidity, so you only get symbols that are very liquid according to their liquidity algorithms.

It aligns with technical directional views, finding bearish credit spreads on stocks with a bearish outlook and bullish credit spreads on stocks with a bullish outlook.

The report condenses all of this information into a single report, making it easy for traders to find opportunities.

Details of the Credit Spread Report

In this section, the speaker explains in detail what information is included in the Credit Spread Report.

Breakdown of Information Included

Left-hand side shows symbol and direction (bullish or bearish).

Second section shows details such as call or put, strikes being sold and bought, expiration date, potential risk or reward (percentage of vertical width collected), IV rank, and earnings.

IV rank indicates implied volatility rank at the time of trading.

Earnings show whether there are any upcoming earnings reports before expiration date.

Benefits of Using the Credit Spread Report

In this section, the speaker discusses why using the Credit Spread Report can be beneficial for traders.

Advantages of Using This Report

The report does all of the work that traders would normally have to do manually in a single report.

Probability-wise these are trades that have a higher probability of success.

Traders can use this report to find opportunities quickly without having to spend too much time searching for them.

Aligning Directional View with Credit Spread

In this section, the speaker explains how to align directional views with credit spreads.

Aligning Directional View

The speaker uses XLC as an example of a stock that had a nice run from September of last year all the way through September.

The report looks for stocks that align with technical directional views, finding bearish credit spreads on stocks with a bearish outlook and bullish credit spreads on stocks with a bullish outlook.

This further increases the success rate of trades within the Credit Spread Report.

Optimal Times to Enter Credit Spreads

In this section, the speaker discusses the optimal times to enter credit spreads and how to identify them.

Identifying Optimal Entry Points

The most optimal times to enter a credit spread are when the parts of the chart are shaded in green from a directional perspective.

If you entered a credit spread at bad times, such as near the top end of the trading range, you would still likely be profitable but it would take longer.

The parts shaded in green are your optimal entries for selling credit spreads, while those shaded in red are opportunities for bearish positions.

Technical Outlook and Directional View

A technical outlook or directional view that is conducive for selling credit spreads is when parts of the chart are shaded in green.

Conversely, if you're looking for bearish opportunities, then parts of the chart that are shaded in red are your optimal entry points.

Examples of Optimal Entry Points

In this section, the speaker provides examples of stocks with good timing for entering credit spreads.

EWZ

EWZ has had a nice move in primary trend and has pulled back enough statistically to give us better probability of a move here to upside.

This provides an opportunity to take a quick move that will be profitable relatively quickly.

SPY

SPY was an opportune time to enter a bearish credit spread because we were in a primary bearish trend and had an uptick over past few weeks that really stalled.

UPS

UPS has entered a bearish trend after breaking down below a major support level and coming back up to this 190 level.

This provides an opportunity to move here to the downside.

Evaluating Opportunities with Credit Spreads

In this section, the speaker discusses how to evaluate opportunities using credit spreads. They provide examples of charts for Goldman Sachs and Boeing and explain how to identify optimal entry points.

Evaluating Opportunities with Credit Spreads

Primary downtrend in Goldman Sachs chart

Confirmation that Goldman Sachs is not at optimal entry point yet

Cues near top end of range provided best risk reward ratio

Examples of other symbols such as Boeing with long-term downtrend but recent rally

Opportunity to enter Boeing trade today down 4.5%

Using reports to find opportunities and potentially enter trades

Next Steps for Trading Credit Spreads

In this section, the speaker discusses the next steps for trading credit spreads, including managing trades and paper trading.

Managing Trades

Pre-recorded sessions available on managing credit spread trades

Rules around managing credit spreads

Paper Trading

Use paper trading feature in Options Play platform to practice trades

Contract calculator helps prevent account blow-ups

Accessing Reports

Reports are located in Options Education Hub accessible from upper right-hand corner of Options Play platform

Opportunities in the Market

In this section, the speaker discusses the current opportunities in the market and how to access them.

Bullish Opportunities

There are a few bullish opportunities available in the market.

Oversold stocks like Square and SLV have generated bullish signals.

Internet stocks and gold miners also present bullish opportunities.

Accessing Reports

The speaker provides a report of all current opportunities in the market.

To view a specific symbol, click on it on the right-hand side of the report.

This will bring up Options Play platform where you can view trades for that symbol.

Paper Trading Feature

Options Play has a paper trading feature where you can add positions to your portfolio.

You can view these trades in your paper trading portfolio or any other portfolio you create.

Use your tool to show only your paper trading portfolio.

Position Sizing

Position sizing is arguably one of the most important things to learn when trading options.

The number of contracts sold defines how much you can potentially risk and make.

Use Options Play's Risk and Investment Calculator to calculate appropriate contract numbers based on account value.

Using the Risk and Investment Calculator

This section discusses how to use the risk and investment calculator to avoid blowing up your account by not trading enough contracts.

Margin Requirement on a Credit Spread

The max risk is your margin requirement on a credit spread because that's the most that you can lose.

Use the risk and investment calculator to help you stay within your lane and avoid trouble from blowing up your account.

Importance of Using the Risk and Investment Calculator

It is important to use the risk and investment calculator every time you place a trade.

The calculator automatically does the work for you, ensuring that you calculate the number of contracts correctly.

Failure to do so may put you at risk of blowing up your account.

Q&A Session

This section covers some questions asked during a Q&A session about debit spreads, credit spreads, expiration dates, and other related topics.

Buying In-the-Money Debit Spreads

Sometimes it makes sense to buy in-the-money debit spreads, especially if you want to minimize theta.

Whether to use debit or credit spreads depends on your outlook of the stock.

Risk-Reward Ratio for Selling Credit Spreads

Selling credit spreads has a good risk-reward ratio since you're collecting 42% of vertical width.

Premium vs Width Comparison for Credit Spreads

Options Play is working on adding this feature request where users can compare different credit spreads based on premium vs width.

Exiting Trades Before Expiration

Holding trades until expiration is generally not recommended as it puts investors at risk of being assigned on their option.

Always manage trades before expiration using best practices outlined in step two managing trades video.

This section encourages viewers to sign up for Options Play and access the platform, reports, and daily trading signals.

Accessing Tools on Options Play

Go to optionsplay.com webinar to sign up for a free trial.

Get access to the platform, reports, and daily trading signals.

Learn alongside with us on your next steps.

Debit vs Credit Spreads

This section covers more questions about debit spreads and credit spreads.

Favoring Debit Spreads Over Credit Spreads

There is no favoritism between debit spreads and credit spreads.

The choice depends on an investor's outlook of the stock.

Using Short-Dated Options

This section discusses using short-dated options in trading.

Selling Short-Dated Options

Some investors prefer selling short-dated options.

Risk-reward ratio depends on an investor's outlook of the stock.