Income Strategies

Strategy

 My option trading strategy is used to collect premiums over and over again. I prefer the slow and steady gains by using an extremely high probability trade. In this system, I trade high percentage winning credit spreads month after month.

One advantage of credit spread trading is that in order to profit, we don’t need a directional move in the market. Instead, we profit from time decay. That’s the beauty of this system. We don’t need to rely strictly on picking directions and timing the market. Because we are placing our credit spreads on options that are out of the money, we are giving ourselves breathing room in case the market moves against us.

What is a Credit Spread?
 

A vertical credit spread is constructed by buying one option and selling another option of the same type (call or put) in the same expiration month, where the option sold is more expensive than the option bought, resulting in a net credit to your trading account.  With a credit spread there is a margin requirement based on the difference in the strike prices and the number of contracts traded.

The market can even go against us and we still make the same amount of money. We profit from time decay. The rapid decay in option's value works in our favor. Time is on our side. We don't need to rely on market timing to profit. Because we give ourselves a cushion when we place the spread order, we can weather a downturn or upturn and still profit.

Our trades have a high probability of expiring worthless at expiration month-after-month. We usually do not have to make adjustments to the open trades. Instead, I prefer to enter the spread trade and then let them expire worthless. But when the market is moving in one direction I will exit (close) an open trade if I have realized 80%, or more, of the original profit. The best part of this trading strategy is that we collect all our profit upfront. The credit goes into our trading account when the spread order is filled.

The Credit Spread

The key is choosing Put and Call options that are very FOTM (Far Out Of the Money) . I trade options that I expect to be worthless at expiration. My strategy is very boring and good for those desiring a steady approximately 2% monthly return with minimal risk. I only process 5 trades a month and normally start with Bull Put or Bear Call Credit Spreads earning approximately 2% each.

Risk Management

I want my cash flow to stay positive and I want to keep collecting credit premiums month after month. I am a risk manager first and an investor second. Sure there are other option trading strategies that can make more money. But nothing in life is free. Greater rewards means greater risks and greater risks is how you get wiped out. You will never last long taking on greater risks when trading. Credit spreads provide us an automatic hedge since your loss is limited. When a credit spread trade is filled immediately focus on protecting this position and the premium I collected.

Trading Capital

With this strategy your trading capital is only used to support margin requirements. Most option brokers  allow you to invest this capital elsewhere to be used as collateral for spread trading.These brokers do not require margin to be in cash so you can actually earn more than just the spread premiums. Trading capital can be invested in cash management account ( CMA ) that pay interest monthly.