Why Should you Learn credit spreads?
Credit spreads are “Income Producing”.
I love these words! What picture comes to mind when you think of them?
Many traders think of their trading account as one would an investment property, but with the ability to make much higher returns. Imagine if you owned a rental property, such as a house, that was worth $200,000 and was mortgage free. Could you rent it out for $2,000 a month? If you could, that is a 1% return/month, and you still have to pay for taxes, insurance, and upkeep. Of course, your overall return is boosted if the value of the home rises, but that doesn’t help with short-term cash flow because you can’t realize those gains until you sell the home. So, if you needed $10,000 per month to live on, you would have to rent out five or six mortgage-free houses at $2,000 each month. Your total upfront investment would be in the neighborhood of $1.2 Million. That’s not feasible for most people.
Here’s what gets savvy traders really excited: Their trading account acts like an investment property, but without the hassles of dealing with tenants and with a much stronger income potential than just a measly 1% return on investment per month. Making a conservative 3% per month using this strategy, a person with a $200,000 investment account can earn… well, you do the math. It’s good money!
Credit spreads are the secret that professional traders keep guarded closely for themselves. It is all about bringing cash in and then keeping it, which brings us to the next big reason…
Credit spreads put TIME on OUR side.
Your best friend in all of this is not the movement of the market, but a thing called “time decay” which refers to how the value of an option “erodes” or reduces with the passage of time. Because of the effect of time decay, you can make money on the right trades, without needing to accurately predict the direction of the Market.
As a matter of fact, Lee Lowell, who wrote the book Get Rich with Options, calls credit spreads the ALL-STAR STRATEGY. Lowell says, “One of the greatest benefits of the option credit spread is the cushion it gives you in case of incorrect directional prediction.”
Credit spreads eliminate the need to correctly predict the direction of the market.
You heard that right… you don’t have to be exactly right on the direction of the stock to be profitable. Now that’s sweet! If you’re bullish, the stock can go up; it can go sideways and even pull back a little to still be profitable. It doesn’t get any better than that! Credit spreads are King!
I really want you to be clear on this. When a speculator (or “donor” as I like to call them) buys the front month option he/she has to be right on the direction in order to make a profit. That’s a 50-50 bet and certainly not good enough for me. As a seller of options you have 3:1 odds in our favor when we sell to front month option buyers. I gotta say it again, that’s sweet!
Credit Spreads are not a DAY TRADING strategy!
Most people don’t realize that day trading chains you to your computer screen for more hours than the markets are open. You become a slave to the markets and it’s a miserable way to live. You’ll soon wish you could just go back to a regular job.
You will never be glued to your computer screen trading credit spreads and you can still have a life. Once you place the trade, you can turn your computer off. It’s actually better not to watch every price tick (way too emotional). You could even call this type of trading “boring”; however, I can assure you, it is anything but! It’s exciting when you sell options on a stock that goes absolutely nowhere and you make a cool 3% (or much, much more) that month! I don’t know about you, but that gets me fired up! Once mastered, you can actually spend time doing what you want, instead of having my nose pressed against a computer screen.