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CREDIT SPREADS


Beginners Guide to Low Risk, Secure, Easy to Manage, Consistent Profits for Long Term Wealth Creation


Casey Boon



Table of Contents




CREDIT SPREADS1

Table of Contents2

Introduction4

Chapter One:  What is a Credit Spread5

Chapter Two:  How to Get Started Trading Credit Spreads8

Chapter Three:  The Bull Put Spread Strategy12

Chapter Four:  Bear Call Spread16

Chapter Five:  Short Butterfly Spread20

Chapter Six:  The Iron Butterfly Spread23

Chapter Seven:  Advantages and Disadvantages of Options Trading26

Chapter Eight:  Risk and Probability of Profit28

Chapter Nine: Risk & Money Management30

Final Words34



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Introduction

If you are considering an investment strategy that has a high potential for returns while limiting the risk of losses, options trading is an ideal place to start. While options trading can appear complicated to beginners, there are many tools and strategies available to you to help the novice trader start making profits from their trades sooner, generating consistent returns month after month. One of the best tools available to you is credit spreads. 


Credit spreads allow you to make returns in any market whether bearish or bullish and while you make predictable returns, you also have a limit to your potential losses. Credit spreads are quite simple to learn and present opportunities greater than those offered by simple buy and hold investment strategies. 


In this book, we will explore credit spreads and their relationship to options trading as well as explain how you can get started using credit spreads by opening your first options brokerage account. We will then walk through each of the credit spread strategies, from beginner to advanced and how these work with detailed examples. These strategies can be applied in every market whether stocks are falling, rising, volatile or stable. 


This book will also explain the advantages and disadvantages of each strategy as well as options trading in general. We will also teach you how to determine the probability of success for each trade allowing you to create a trading plan that when followed, will generate returns every month allowing you to compound your wealth a rate far greater than standard assets. 


Options trading is not without risk though, therefore we will explore risk and money management in our last chapter including how to create and use a trading plan and helpful advice on getting started in trading without losing your entire portfolio. 


If your goal in life is to amass wealth at a rate faster than real estate investors or stockholders, trading options can be highly lucrative yet also predictable, and allow you to generate consistent profits and over the long term, create wealth which will enable you to get closer to retiring in comfort. Whichever you decide, credit spreads are one of the safest and most reliable strategies available for traders and are an excellent place to start learning. 



Chapter One:  What is a Credit Spread


Options Trading

Before learning what a credit spread is, you will need to understand what options trading is and how they work. Options are contracts which allow the buyer the right to buy or sell an underlying asset such as a stock at a specific strike price on a specific date. The holder of the option is not required to exercise the option.


The seller, on the other hand, has an obligation to fulfill the buyer's request, whether to buy or sell. When the owner of the option is seeking to buy at a price, this is known as a call. If the owner holds the right to sell at a specific price, we identify this as a put. 


Credit Spreads

Before we can dive into the exciting strategies of options trading, we first must learn what a credit spread is and how we can use it to our advantage. A credit spread is also known as a net credit spread. This is a financial term that involves the purchasing of one option and simultaneous sale of another option in the same asset class but with different strike prices. 


The strike price is the fixed price of an option which the owner of the option can buy or sell. In trading, we use the term call when purchasing an option and the term put when selling the option. 


When an investor performs a trade, they will receive a net credit when entering the position and as the spread narrows, the greater the profit. This isn’t entirely risk-free of course as a wider spread can lead to an investor having to pay a debit spread. This occurs when the investor purchases the option at a high premium and sells at a lower premium to minimize their risk.


Options spreads are one of the most powerful tools you have available to you when trading options. They are essential when combining more than one position on options contracts which are the same security to create an overall trading position.


You can find options spread amongst complex trades. This is an industry term to define trades which are just a small share of the total volume of trades. This contrasts with a majority the options which are traded on U.S. exchanges which are termed outright. These are the purchase and sale of an option on its own. 


An example of using options spreads would be if you were to buy in the money calls on a specific stock option only to then write cheaper out of the money calls on the same stock, creating a spread which is known as a bull call spread. You can reap the benefits of a buying calls by gaining if the underlying stock increases in its value. Of course, the stock can go in another direction and decrease in value in which case you would experience a loss. You can maintain control of some of the initial costs when making calls on the same stock which allows you to minimize the amount of money you could potentially lose on a given position. 


When trading options, you will make all profits from the use of spreads. Using spreads will help you manage risk as well as increase the value of your portfolio. You can reduce the costs of going into a position as well as dictate how much you are willing to lose on a given position. While this could also mean you are potentially reducing the profits you could make on a position, your exposure to risk is much lower, meaning it is a far safer strategy when trading options. 


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