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The Insurance Premium Income Spread

Webster's Dictionary defines an insurance premium income creditspread as any option spread strategy which is initiated for a net credit upfront. OK, not really -- but if Webster's had an entry for "credit spread," that's probably how it would read. However, our definition of the term here at TimeTraders generally refers to short call and/or put spreads.

The Insurance premium income spread is designed to collect insurance premiums when a stock moves up, down or sideways.

Insurance premium income spread is one in which sell a high price option and buy a lower price option, thus generating a net credit. Why? Because it is rare for a share to move only in one direction, either up or down. It might move up a couple days then down a couple days, but overall if a stock moves up or down more than 20% in a year, it is a big event. Insurance Spreads allows taking advantage of these market moves.

What Is An Insurance Premium Income Credit Spread?

An insurance premium credit spread in a simple option trade in which the trader sells one option and buys another option farther away from the money. This results in an insurance premium credit to the trading account. This insurance premium credit is the maximum amount that can be made on the trade and is deposited into the trading account as soon as the trade is made.

Selling Insurance premium income credit spreads is more akin to waiting for the big move to occur and it rarely does. Time decay is very relevant because despite being a spread, the spread does have a significant rate of decay in the last week or two. 

The goal is to collect premium month to month. Using an insurance income credit spreads is a way to do this without predicting the market for the month. In any given month, the market can still move sideways, lower or higher and Insurance Credit Spread positions will still be profitable.

Who is it suitable for?

  • Investors seeking extra income
  • Conservative investors
  • Self Managed Super Funds
  • Wealth Accumulators
  • High Net Worth Individuals

How much income can I produce?

Generally an insurance premium income credit spread with a month to expire on top 10 shares will be valued at about 2-3% of the share price. So assuming an insurance premium income credit spread generate 2%, then if it expires worthless, the income produced for that month is approximately 2%. As an example, on $100,000 worth of shares, this 2% equates to $2000, 00 for that month.

You can generate more or less depending on a number of factors. These include, but are not limited to - time to expiry, share price, volatility.

Some months are good for writing options, others are not. Sometimes you can keep the entire premium generated, other times you cannot. We aim to make 2% and attempt this for at least a few months of the year. If you can do that and still hold onto your shares, then you can see how that can make a difference to your share portfolio over time.