Vertical Spread – How To Generate Reliable Monthly Income From The Stock Market

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A favorite directionless investment method with option sellers is called the credit spread or the vertical spread. One reason it’s so well-liked is because it’s one of the easiest option strategies to understand. Another explanation for it’s attractiveness is that once the trade is placed there can be very little attention needed to supervise it – allowing the credit spread trader to go out and spend their time doing other things rather than sitting in a dark room staring at a trading screen all day long.

The vertical spread is a fundamental element to numerous other option spread strategies including the iron condor, the butterfly spread, the double diagonal and others. It if fairly common for beginning option traders to gravitate to this strategy soon after discovering options and once they have gotten their feet wet with the purchase of straight calls and puts, then covered calls, and debit spreads.

Traders like to sell these vertical spreads because when invested correctly the trades have a good probability of success and can allow the investor to still profit and ‘win’ without having to be exactly right with priced direction and movement. When sold correctly, credit spreads can bring the trader a good monthly return while the individual actually placing the trade could be incorrect with their belief and ‘prediction’ of where the stock market would be heading next.

For example let’s say our trader is bearish on the stock XYZ. XYZ is trading at a recent high and our trader believes that the stock will not move any higher over the next 30 days. So, he sells a bear call spread – a call option vertical spread that benefits in a neutral to bearish scenario.

This trade can win in 3 of 4 possible stock movement scenarios by using this option spread. If the stock drops like our trader thinks it will, the spread trade wins. If the stock doesn’t move up or down – just stays pretty much in the same area as it currently, the spread wins. Even if the stock moves upwards – defying what our trader believes will happen – this spread trade could still be profitable – as long as it doesn’t move above a certain level. So, in each of these scenarios, this trade would be profitable. The only way they would not be profitable is if the stock moves up past the level that has been sold – in which case the trader would then need to either remove the trade for a possible loss – or adjust the trade in an attempt to make it profitable once more.

Learn more about the vertical spread. Stop by Ted Nino’s site where you can find out all about trading the iron condor and what it can do for you.

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Vertical Spread – Getting Wall Street To Cry ‘Uncle’

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A number of different techniques and strategies are available to option investors to help assist them in achieving consistent and reliable monthly income from the option market.

Some of these different strategies include the calendar spread, the butterfly spread, the diagonal spread, the iron condor, and the Vertical Spread, also known as the Credit Spread.

The vertical spread is actually a very important and core strategy that is found in many if not all option strategies – including the ones just mentioned. As an example of this, look at the iron condor. This strategy is simply just two vertical spreads – one placed above where the stock being used is trading at – and one below.

The butterfly position is also comprised of vertical spreads. The lower half portion of the butterfly spread is simply a vertical spread – as is the top half. Same goes with the iron butterfly. This trade also is built from verticals – a call vertical and a put vertical.

The vertical spread trade can be built from either call options or also put options.

Following is an illustration of a bull put vertical spread…

Sell 1 ABC Stock 75 Put Option Buy 1 ABC Stock 70 Put Option

The vertical spread in the example above is a bearish position. Our hypothetical trader who placed this trade believed that RIMM would be moving lower – or staying in it’s general vicinity on the chart.

This position is called a bull put spread due to the fact that even though the position is created using put options, it is being placed in such a way that generates a profit if and when the stock being used moves bullishly.

As long as the outlook on this trade is correct and RIMM stays where it is at or heads downwards, this trade will ‘win’ and the initial credit received when the trade was first placed will become the profit.

Learn more about Vertical Spread. Stop by Ted Nino’s site where you can learn everything you need to know about how to trade the Credit Spread for monthly income.

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Credit Spread – How To Make Consistent Monthly Option Income

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The Credit Spreadis one of the more popular strategies among option traders. Along with being one of the easier option trading strategies to understand, another reason newer option traders in particular gravitate to this strategy is that it can require very little time to manage it while it is on. Another way to put it, is that credit spread sellers don’t need to be glued to their computer screens all day watching every tick of the market in order to generate consistent income with this trade.

The credit spread trade is a basic building block of many if not most other more complex option trading strategies such as the iron condor spread, the butterfly, and the double diagonal trade. For example, the butterfly is created using one credit spread and one debit spread, while the iron condor is made up from two credit spreads, one on either side of where the underlying is currently trading at.

Traders like to sell these vertical spreads because when invested correctly the trades have a good probability of success and can allow the investor to still profit and ‘win’ without having to be exactly right with priced direction and movement. When sold correctly, credit spreads can bring the trader a good monthly return while the individual actually placing the trade could be incorrect with their belief and ‘prediction’ of where the stock market would be heading next.

To demonstrate let’s invent a trade where the option trader feels as if the stock being traded is about to tank. Because he believes that this specific stock will not advance any higher from it’s current position a bear call vertical spread is sold, bringing in a nice credit.

The only way this spread trade can lose money is if the stock winds up doing 1 out of 4 possible scenarios – giving our trader a three out of four likelihood of winning. If the stock moves down as our trader predicts he wins. If the stock stays stagnant and goes nowhere, he wins. In fact, even if the stock moves against our trader and heads upward he wins just so long as the underlying doesn’t move so far as to breach the spread sold. The only our trader loses is if the underlying moves far enough upwards passing the option strike price that was sold – which if it does, our trader could still salvage the position through appropriate management and adjustment methods

While credit spread trading can be a great way to generate passive income, of course like any investment method there are potential pitfalls one should be aware of before jumping in. To learn more about how to properly trade this option strategy, including how to correctly place, manage, and most importantly how to ADJUST them, visit our free video training website at Credit Spreads

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