Credit Spreads are a great way to make money in the market without having to own any shares. I'm assuming for this post that the reader already has some understanding of what options are. If you want to get an idea of what they are, I have briefly discuss them on my first post. This strategy is offered by Planet Wealth and is a staple of their trading strategies.
Credit Spreads use 2 legs of options in a strategy wherein you sell an option to make money from the premium, and you also buy an option as a protection in case things don't turn out to be what you expect, and then pay an insurance fee for it. In this strategy, the premium you receive is always much greater than the insurance fee that you paid for, and the net amount is called the credit. Also, with this strategy, generally there is a difference or a spread between the strike price of your buy option and your sell option. Hence, it is called credit spreads.
There are 2 types of credit spreads:
- Bull Put Spread
- Bear Call Spread
A Bull Put Spread is used when you have a bullish view of a particular stock. This strategy generally involves buying a Put at a lower strike price than the strike price of your Sell Put. For example:
You buy a Put of XYZ Corp at the strike price of $10.00 for March 09 for a fee of 10cents
You sell a Put of XYZ Corp at the strike price of $10.50 for March 09 for a premium of 25 cents
You then have a net of 15cents. If you stay on the trade, and the share price of XYZ Corp stays above $10.50, then you get to keep the 15 cents premium! Obviously, all these comes in lots of 1,000 per contract, so imagine if you had 20 contracts of these! That would be a potential profit of $3,000 out of a $10,000 risk! That is a good return on investment!
Bear Call Spread
A Bear Call Spread is the opposite of the Bull Put Spread in that this strategy is used if you have a bearish view of a particular stock or share. This involves buy a call at a higher strike price than the sell call for this share.
For example:
You buy Call option of XYZ Corp at the strike price of $15.00 for March 09 for a fee of 8cents
You sell Call option of XYZ Corp at the strike price of $14.50 for March 09 for a premium of 20cents
The result is a credit of 12 cents. If you stay on the trade, and the share price of XYZ Corp stays below $14.50, then you get to keep the 12 cents premium!
Obviously these are just examples, and you need to look at your charts and take a view on where the direction is for a specific share.
There is definitely more information on the e-books offered by Planet Wealth, and if you're serious with making money using this strategy, get your copy NOW! I can only say that it's been the best $99 investment I've made, and on my first month, I've already recovered it from my successful trade!
I hope this has been another beneficial post, and one that would encourage you to take the next step, if you haven't already done so.
Another sharemarket secret unveiled!
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