Credit Spread Options Strategies Explained (Guide w/ Examples)

[@projectfinance]

Interested in getting first access to my options strategy data library where I analyze the performance of popular options strategies with various trade management rules? Sign up for my newsletter and see the welcome email for more information: pfnews.substack.com/subscribe Get $200 to $250 in free stock when opening a new tastyworks brokerage account: geni.us/tastyworks

[@billyblack3816]

I'm completely confused. How do you sell a put or call THEN buy another one? Don't you have to own something before you can sell it?🤔

[@jonathandoe2321]

@@billyblack3816 you can sell them without owning the underlying (naked) or with owning stock (covered). It's cheaper to sell naked calls but you're more susceptible to a good ole Guh

[@billyblack3816]

@@jonathandoe2321 I've learned so much sense that comment lol. But thank you.

[@jonathandoe2321]

@@billyblack3816 all good homie, hopefully you got a little cash to go with that knowledge ;)

[@TeamProductsOnline]

Just wonderful, I've been looking for "what is a calendar spread option strategy?" for a while now, and I think this has helped. Have you ever come across - Consaac Dumbfounded Control - (do a google search ) ? It is an awesome one off guide for discovering how to master options trading without the normal expense. Ive heard some decent things about it and my brother in law got amazing success with it.

[@oliverreiche4566]

I must admit that this one was one of the best explained videos regarding credit spreads trading! Strong recommendation to watch for everyone!

[@projectfinance]

Thank you!

[@Eastbaypisces]

@@projectfinance so one i wanted to know was since doing this kind of trade how much collateral do we need? or is it not needed as much since we are doing the spread to limit our losses?

[@projectfinance]

@@Eastbaypisces the required collateral is the max loss of the trade. Example: you sell 1x $10-wide spread for $3.00. Max loss is $700 and that is the required collateral to enter the trade.

[@1sbutterbeanok]

@@Eastbaypisces robinhood has a $100 minimum collateral even if the risk is less in my experience. If your risk is higher they will match that collateral. I just noticed I was risking less than 100 and they still required $100. Others may not

[@EF-rj5gp]

@@projectfinance that is the advantage for Credit Spread given the low capital requirement?

[@drod8313]

I was trying to learn credit spreads and wasted my time with other videos with people who might be great at trading but are awful at explaining. The way you explained everything slowly and with examples was top notch. You are a great teacher. Thank you so much!

[@satinderbank4607]

THE BEST video to watch if you want to understand this concept clearly told, with examples. Explained like a Pro. Thank You 👍👍

[@projectfinance]

Thank you so much for the comment!

[@MalachiKOK]

I've watched about 10 videos trying to learn credit spread and In the first minute of this video I have learned more about Credit Spread Options than I have watching any other video. Thank you so much for making it easier to understand.

[@MalachiKOK]

hit that subscribe button asap!

[@BarryPaste]

14:30 - explanation of why the max loss is the price it is. Exactly what I was looking for, thanks man

[@saketmulge9003]

I have been looking around to get such a detailed explanation on KZbin and yours is the only best one. Thanks a lot.

[@projectfinance]

Awesome! I'm glad this one was helpful. I'll need to make an updated version of it.

[@ebeaulieu813]

Finally a full explanation of credit spreads with profit and loss. Most importantly how the loss is calculated no tthat its hard to figure out most of these explanations don't show how to do it. THANKS!

[@lsrk1d]

This is the best video explanation on YT, hands down. I've watched a couple others that made me more confused. Thank you so much!

[@projectfinance]

Thank you so much for the comment! I really appreciate it! -Chris

[@4kpm]

Totally agree THE BEST ,Others trying to confuse you with terms such as LONG( BUY) SHORT( SELL ) - PUT OR CALL its confusing as they wanted you to purchase the courses :D

[@admiralknnight5779]

ALL STRATEGIES ARE VERY NICELY EXPLAINED. KUDOS TO YOU.JUST ONE SMALL QUERY. ALL THE TRADES END AT EXPIRATION. HOW SHOULD THE STRATEGY BE USED IF THE TRADE NEEDS TO BE CLOSED BEFORE EXPIRATION?

[@Kcashgunna]

I've searched through thousands of videos for simplistic explanations. Thank you so much.

[@shrishri396]

Great explanation...thankyou. Could you post a video explaining how far the spread should be for max profit with using the least margin.

[@urvi_3040]

Awesome information thanks. Do we need 100 shares or collateral of 100 shares when using this credit spread strategy?

[@ricardomassey973]

You are using collateral with credit spreads.

[@whcapital2042]

I have a question, when doing these credit spreads, do you need collateral to make these trades?

[@karanjadhav2041]

I haven't yet completely watched full video and it felt like my doubts are going solved out finally. Thank you 😊 for posting such a great content.

[@allprofits4you]

thanks nice vid i wonder can this be used also in the futures market?

[@DiamondEubanks]

Omg!!! This video has helped me so much! I was so confused about credit spreads! Now I can't wait to start trading them!

[@projectfinance]

Glad it was helpful!

[@chevy8758]

Dude, Thank you for having a video that actually explains what you're doing

[@projectfinance]

You're welcome! I'm glad you liked the video! -Chris

[@MikeGuilmot]

Finally understand spreads. People make things so complicated. Great video.

[@boomblue08]

Hey so i'm confused on when to close out. Do you have to wait until the expiration date and just let it time out or do u close it when ever u have profit?

[@projectfinance]

Hi Alex, You can close an option position whenever you want. The expiration doesn't change the trading 'rules' of the contract, it just means after that expiration date the option will no longer exist. Here's a video I just did that talks about this topic: kzbin.info/www/bejne/f3iWpX2of76XaLc I hope this helps! -Chris

[@jfinca]

Thank you, I was wondering the same thing.

[@neymarmagic3353]

Quick question, what if u get exercised or assigned? Im really confused about that? Can u please help me with that, thats my biggest worry.

[@neymarmagic3353]

Ty

[@averagejoey2000]

@@neymarmagic3353 many platforms require you to keep collateral on hand to purchase the shares to at exercise. if you sell a put and get assigned, you but overpriced shares and take a loss. with a bull spread though, you still have the option you bought, which becomes worth more after the price drop. sell it to close and you might have enough to cover your loss

[@thomasomuldoon3131]

great! a vid that actually shows how to put on a spread that makes money, not just all the gadgets that ALLOW you to sink or swim!

[@projectfinance]

Thanks for the comment, Thomas!

[@bigljb123]

does the spread expiration have to be long? if i know a stock is going to trading sideways for a week, can i buy weekly spread?

[@dejpsyd0421]

My question...as you set the spread up on Tasty Works like you did for LUV, then does TW execute the spread all at once? Or do you have to put each leg on yourself? And if it’s the latter, what happens in a real-time market as the prices are moving and you don’t get the spread you want as you’re trying to get in one leg at a time. Same with exiting...ok, if you wait until expiration that’s self explanatory. But what if you wanted to take an early profit...again,,do you have to exit one leg at a time, or???

[@RemixN007]

Im still confuse. So using your call credit spread example @4:50, as long as the stock price is lower than your call credit spread, you make money? If that's the case why not do it for all 'bad' stock so that way it's guaranteed that stock price will always be lower than the credit spread?

[@projectfinance]

Yes, that's correct. If the stock price is below the call credit spread's lower strike price as time passes, the spread's value will slowly go to $0 and expire worthless at expiration. Or, if the stock price falls, the spread's value will also decrease and you can buy back (close) the call spread for a profit. You can do exactly what you're proposing, but it's not obvious which stocks will go down. Very often "bad" companies can experience large stock price increases. You don't know the time frame of the stock price decrease, even if you're sure the company is going to fail in the long run. A google search for "Bill Ackmann Herbalife Short" can show you how betting against "bad" companies can work out.

[@AminaPhilosophy]

Can you explain the idea of the premiums narrowing for credit spreads and widening for debit spreads?

[@smart7sources]

Do I need to enable margin on my account? TOS says I don’t have margin enabled and that why I can’t trade put credit spread option.

[@cinnamonbk1186]

Thank you so much! Great video and explanation:)

[@EverythingZach]

Quick question, when in profit in a pos. like this, do you have to wait to exp? or can you just cover the short position on the option?

[@projectfinance]

You can close the entire trade at any time

[@EverythingZach]

@@projectfinance Thanks for the reply, and is the purpose to hold until exp?

[@projectfinance]

@@EverythingZach the purpose of an options trade is never to hold until expiration, it only signifies the last day the option can be traded/the day the option's final value is determined (its intrinsic value)/will cease to exist afterward

[@EverythingZach]

@@projectfinance Understood, I was more so referring to the credit part, as its being written / sold short

[@projectfinance]

@@EverythingZach Typically you would close both legs of the spread together, but you could buy back (cover) just the short option and continue holding the long option. If you buy back the short option in a credit spread for close to nothing then that means the long option is also worthless (since it's further OTM) and in that case it would make sense to only close the short and hold the long as a "lottery ticket"

[@tprealty]

thank you for the videos , what if scenario 1 we're to happened for both credit put/call spread? will i be assigned ? i thought i will need to roll the new spread to a higher/lower strike price accordingly , please advise thank you

[@afgluda]

Can you close those spreads prior to expiration

[@seeruhs8076]

Very good explanation of the spreads. I may have missed it, but did you go over "collateral" in this video?

[@projectfinance]

Hi Cyrus! Thank you for the comment. I don't think I covered collateral/margin in this video, though I should have. For a credit spread, the margin requirement for each spread (with most/major brokerages) is equal to: (Spread Width - Credit Received) x 100 If you sell a $10-wide spread for $3.32, the margin requirement would be: $10 - $3.32 = $6.68 x 100 = $668 in margin requirement PER spread sold, as the maximum loss potential per spread would be $668. This assumes we're talking about standard equity options with a contract multiplier of 100 (the options correspond to 100 shares). I hope this helps! -Chris

[@andrewjohnson5524]

projectoption For some reason, this video seems backwards to me. Keep in mind, I’m incredibly new. Not criticizing, just wondering if you could clarify. I’d really appreciate it! I was under the impression you’d want to buy the strike that was above (in the case of a put) or below (in the case of a call) the strike on the option you’re selling. That way you’d be “covered” if the stock reached the strike you sold and was exercised. Obviously, this is in contrast to the video. How do you mitigate the risk of the option you sold actually getting exercised, and having to cover? It seems the maximum loss potential is much higher than what’s described in this video. Is your explanation describing a scenario under the assumption you already own 100 shares of the company you’re creating the spread on?

[@realestateinfonet9041]

Thank you very much for taking the time to provide us all this helpful information. You are doing us a great service. Sincere regards!

[@davidgroth26]

This was really, really clear. Very good job, thank you!

[@projectfinance]

Thank you for the comment and I'm glad the video helped!

[@tonkatonksebo]

Hi! Do I -HAVE- to sell and buy an option as a standard set up? I mean why buy if you are confident that the stock price will stay above (if we sell put) the strike price? Wont it be more profitable?

[@alansmith888]

Do you typically sell before expiration if you have max profit? Or do you let it expire? Does that mean you have to exercise the shares?

[@projectfinance]

Yes most of the time you will close the spread prior to expiration. If you reach a large percent of the maximum profit it makes sense to close the trade as you have little left to gain and a lot more to lose. You can close your spread anytime you want to and at whatever P/L level you may have at the current moment.

[@alansmith888]

@@projectfinance Thanks! I just bought my first call credit spread for SPY 275/277 expiring 13 April. All thanks to your video! Its kind of confusing on how it looks on my brokerage (interactive brokers) as its showing a 23% loss even though SPY is at 273? Could you advise on how that works? Thanks

[@aerotrade1826]

for the speeds maximum loss is always higher then then maximum profit ?

[@redpilldude8688]

Fantastic explanation. Many thanks.

[@rgasta7765]

I enjoyed this video. The only thing I don't get is why they say there is a 60% probability of winning? is it based on support and resistance/technical analysis? Thanks

[@projectfinance]

It was based on the example spread at that part of the video. When selling call/put spreads, typically you'll be selling "out-of-the-money" spreads, which means the call strikes are above the stock price / the put strikes are below the stock price when you enter. Since you will make money if the stock doesn't move at all as time passes, you have a high probability of profit because you don't need anything to happen to make money. The stock can even move towards your spread a small amount and you can still make money. But because of the high probability of profit, the spreads will have more loss potential than reward potential. Probability of Profit / risk:reward of any options strategy are always connected. High Risk / Limited Reward = High probability of profit Limited risk / unlimited reward = low probability of profit

[@rgasta7765]

@@projectfinance Thank you projectoption. Even if I disagree a little about "high POP" because a stock can swing in any direction anytime, the question I (still) have is : when I sell an option I place a bet against "the house": who is the "house", The broker ? Obviously, the house, whatever entity it is, knows exactly what is doing, just like a casino, only the pro can be at the house, in my opinion. Is this "casino" concept correct? are we basically betting against someone that is hard to beat and eventually we lose money?

[@yaks6312]

Do you have a video on the risk of getting assigned

[@74bungalow]

Do you have to hold credit spreads to expiration?

[@shafi10a]

No you can close any time before expiration

[@905jdw]

@projectfinance , how do you know if you should sell an atm otm or itm call or put for the credit spread

[@mrsamlim]

Hi if it expires between the credit spread wouldnt it make the buy option expire worthless leaving you with sell options to account for?

[@bsdgffishtuna5186]

Great video. But do you ever look at options strategies involving selling deep in the money puts - I just noticed that jul 24 TSLA 1900 puts are around $305. I don't want to do anything stupid (been there done that) - but I was wondering if there was a safer strategy to take advantage of some of that premium. Apart from selling the put - can you Suggest a hedging strategy to cast a wide net selling these high value puts - buy calls? spreads. Thanks for any example.

[@markdapkus395]

I noticed in the call credit spread at (5:10) you stated both the calls are out of the money, however, wouldn't the short call 180 be in the money therefore you collected the difference in premium?

[@markjackson3531]

thats what i was thinking, couldnt whoever bought the 180 call from him have excercised when it went over 180? (first example)

[@disco4535]

Lets say Im doing a call credit spread using the example at 4:00, is it possible to do multiples of that same strategy? Like doing 10x of those contacts with the exact same numbers?

[@projectfinance]

Yep and then you 10x the max profit and loss potential

[@ev4836]

Is the call/put credit spread the same as a vertical spread?

[@projectfinance]

Yes! It's really confusing. There are many names for the same strategies. Here are the aliases of the strategies: Buy a Call Spread: Long Call Vertical Spread, Call Debit Vertical Spread, Bull Call Vertical Spread (or any of these names without "vertical" -- Bull Call Spread / Long Call Spread) Buy a Put Spread: Long Put Vertical Spread, Put Debit Vertical Spread, Bear Put Vertical Spread (or any of these names without "vertical" -- Bear Put Spread / Long Put Spread) Sell a Put Spread: Short Put Vertical Spread, Put Credit Vertical Spread, Bull Put Vertical Spread (or any of these names without "vertical" -- Bull Put Spread / Short Put Spread) Sell a Call Spread: Short Call Vertical Spread, Call Credit Vertical Spread, Bear Call Vertical Spread (or any of these names without "vertical" -- Bear Call Spread / Short Call Spread) I'm sorry for the confusion. People mostly say "Credit Spread" or "Short Spread" when referring to shorting the spread, like "call credit spread" or "short call spread." And "Debit Spread" or "Long Spread" when buying the spreads, like "call debit spread" or "long call spread."

[@ev4836]

@projectoption thank you for the detailed answer 🙏. I’m going to start practicing simulating these type of trades to get a feel for them.

[@jbabe3282]

Must I own enough underlying stock to do these trades?

[@paulkaz1752]

Great video, very clear explanation. What is the risk of being assigned here?

[@projectfinance]

Hi Paul, thanks for the comment! The risk of assignment is typically very low. I did a video on this which you can watch here: Assignment Risk Explained: kzbin.info/www/bejne/baG3k2SXaq6aga8 It explains all you need to know about assignment risk. I hope it helps! -Chris

[@kingkhanmalik]

Hello sir very informative video my question is when you say option expire worthless at expiration date do we need to close the trade or let it go without closing and can we exit earlier in the trade to cut losses Thank in advance

[@projectfinance]

You can close a trade whenever you want. If you buy an option, closing the trade means selling the option. If you short an option, closing the trade is buying the option. If you sell a spread, closing the trade is buying the spread. The P/L will be the difference between your entry and exit prices (and accounting for the option contract multiplier and number of spreads/options), just like buying/selling shares of stock.

[@hchau47828]

It is great credit spread option lesson, I learn so much, thank you.

[@gdavid8221]

Do you have to wait 45 days to collect credit or can you close out earlier, like by the end of the day?

[@shafi10a]

You can close at any time before expiration, you just buy back your option

[@AndrettiEra]

thank you great explanation!

[@kammi2590]

thank you GM to informing the public what is going on.

[@justsomeidiotonyoutube7532]

Honestly brother this is one of the most informative and clearly detailed videos I've watched on this topic. Great job! Liked and already subscribed !

[@projectfinance]

Thank you! I appreciate the comment!

[@dwhite3676]

Another great video - Thank you my friend - I am one step closer to making my first option trade!

[@projectfinance]

Awesome! Thanks for watching. Let me know if you have any questions!

[@mesenchymalstemcells]

I really appreciate how you explained this. I have a problem visualizing these set ups and you helped crystallize it for me. What are your thoughts about setting a stop loss for this type of trade? 20 % 30 % ?

[@hoaihuong1234]

Thank you. Well explained!

[@andresalvador1710]

This makes the strategy so easy to understand. Thank you!

[@projectfinance]

Glad it was helpful!

[@andresalvador1710]

projectoption I was wondering - does the cost of trade (which is the spread multiplier) have to be less than the max profit to gain? Sometimes, I see the cost of trade is greater than the max profit.

[@intsikbeho2461]

in depth but great explanation.

[@projectfinance]

Thank you! Glad you liked it.

[@SrslySylli]

I've recently learned about credit spreads but I'm having a hell of a time finding spreads that are worth the risk. You didn't get into in in your video but I'm guessing the "POP" on the trade info line means Probability of Profit? (I use IB, not Tasty, so just guessing.) In this example, is it worth the risk? 62% chance of max profit and (I'll assume the worst) a 38% chance of max loss would give you an average return of 190 x 0.62 - 310 x 0.38 = 117.8 - 117.8 = 0. (I know that the risk of max loss is a bit lower than 38% because of the curve in the spread but it still hardly seems worth it for a tiny edge.) How do you find pairs that have an expected positive return worth your time and effort? Also, how is the POP calculated?

[@daboxownsall]

Credit spreads aren't black and white, you can gain less then max or lose less then max if the price falls between the two strike prices by exp (or assignment).

[@Lmao-ke9lq]

Isnt just better to sell naked put option and set some stop losses?

[@joymiller3140]

how long do credit spreads usually last?

[@Jeremy-vb6tv]

Great explanation, but what happens when it doesn't work out and the stock is below your put spread? Suppose you had 10 contracts... do you own shares afterwards? Or does the broker handle all the conversions so that you don't end up buying shares? Would be nice to see some examples of losses and what happens at expiration.

[@projectfinance]

Great question! If the entire put spread is in-the-money (the stock price is below the long put's strike price), you won't end up with any shares if you hold through expiration because the short put and long put assignment/exercise will offset. Short 10 in-the-money puts = +1,000 shares if held through expiration. Long 10 in-the-money puts = -1,000 shares if held through expiration. No share position. If only the short puts are in-the-money and you hold the options through expiration, you'll end up with +100 shares of stock per put contract. If you're short 10 puts that are in-the-money and you hold them through expiration, you'll effectively purchase 1,000 shares of stock at the short put's strike price.

[@Jeremy-vb6tv]

@@projectfinance thanks for the explanation!

[@mikey.1205]

Such a good explanation. Thanks bro

[@psychoctapus8069]

im here because i sold a credit spread which led to an increase in the value of the spread to a price much larger than my max loss, meaning I’d have to pay way more than my max loss to close the trade. As times goes towards expiration would the loss decrease to my initial max loss?

[@projectfinance]

Which spread did you sell specifically? Stock/Strikes/Expiration/Price. The spread's value may increase over the maximum width of the spread, but it shouldn't exceed the spread width by a significant amount. For instance, if you sold a $10-wide spread, the maximum spread price is $10.00. But, the spread may appear to have a value of $10.03 or $10.05 due to the bid/ask spread. If you hold until expiration, the maximum loss is the spread width. Before expiration, an entirely in-the-money spread may trade slightly higher than the spread width (a few pennies), but not significantly.

[@robertrees2811]

Thanks! Great video

[@bond211098]

Don't we have to close both positions or do we let the spreads expire? I'm confused because if we short a position and close it we do have to buy back the shares right? The buy-side of the spread is a different issue altogether, isn't it?

[@somedude1295]

love your work man, very educational

[@projectfinance]

I appreciate that. Thank you for watching!

[@jemibanez]

How about relative implied volatility aspects (when choosing this strategy)?

[@projectfinance]

Do you mean distinguishing between 'high' and 'low' implied volatility levels before entering?

[@jemibanez]

That's right yes..:)

[@danielgm98]

If you want to close a put credit spread contract before the expiration date, why do you have to pay an amount instead of receiving? If so, at what price do you have to sell the contract in order to keep the full credit you received at the beginning of the trade?

[@projectfinance]

Because if you short a spread (sell the spread as an opening trade), you have to buy it back to close it. The profit/loss will be the net inflow/outflow of money from the two transactions. Example: I sell a call spread for $2.50 ($250 in premium collected). Later, the call spread is worth $1.50 (a premium/value of $150). At this moment, I'd have an unrealized profit of $100 on the call spread. I could buy back the spread for $1.50 and secure my $100 profit: $250 in funds received for selling the spread - $150 in funds paid out to close the spread = +$100 profit on the trade. To answer your question, what price do you need to pay for the spread to get the full profit? $0.00, which means the spread needs to expire worthless (stock price below the short call's strike at expiration). If you short the spread for $250 in premium, your max profit is $250. But you only get that max profit if the spread price reaches $0. It is a fluid process -- your P/L will change every second of the day as the spread price changes. If the spread price is worth less than what you sold it for initially, you'll have a profit. If not, you'll have a loss.

[@danielgm98]

projectoption One follow up question. If the spread price reaches $0.00, and I don’t want to wait until the market expires it, so I don’t risk the price going up again, am I able to close the contract without paying? In other words, I want to close the contract while being OTM in order to secure my profit of the net credit, but I just don’t understand how this works. Your channel is great. I think you have a gift for making complicated stuff so simple to understand. I really thank you for your help! It really helped me to understand more about this topic.

[@thek4232]

Best explanation ive seen.

[@projectfinance]

Thanks for watching and commenting. I appreciate it!

[@thanostimestone6813]

I have a quick question for you.. I bought a put spread than let it expire. Now I have a sell stock but with a available stock buying power of 1,600. Can I purchase other stocks with it and hope the stock goes down to reap the most benefits.

[@projectfinance]

Yes, you can purchase other stocks if you have $1,600 in stock buying power. Specifically, you can buy $1,600 worth of stock.

[@martrades6531]

So holding the position until expiration is when u receive the most profit?

[@projectfinance]

When selling a spread (credit spread) the spreads value will be $0 if it is out-of-the-money at expiration, which is the way you make the max profit on a spread. If you sell a spread for $1.00 and the spread's value gets to $0, you'll have $100 in profits per spread. The spread's value will be $0 if it is OTM at expiration, or if it is very very far OTM before expiration.

[@memories-fh5fd]

so in what scenarios would you buy a call or put option as compared to a credit spread?

[@josephg8818]

What if you do a call credit spread, let's say 25.50 and 25 , and it goes up over 25 how does assignment work if you sold a 25 call ? Would you have to close it out before expiration?

[@projectfinance]

If you hold through expiration and the stock price is above your short call and below your long call you will end up shorting 100 shares of stock (per call contract) at the short call's strike. I'd recommend closing all option positions before expiration. Always.

[@adieucourtier5812]

Great video with good visuals, nice !

[@TheTomG100]

Explained VERY well !.....Thank you.

[@projectfinance]

Glad it was helpful!

[@MrCurtis61]

If you close credit spreads early can you collect less credit, or must they be teken to expiry, unless I did something incorrect on TOS paper trades I closed a credit spread early because I got a signal to exit trade after 4 days of a 21 day expiry and my profit was showing zero?

[@austins.219]

What happens if the spread expires atm but not in the money. Also does someone buy are credit spread or do we literally buy and option and sell and option.

[@projectfinance]

If one of the options expires in-the-money, you'll end up with a stock position. If both options expire in-the-money, the option exercise/assignments will offset and you'll have no stock position. BUT, you will pay exercise/assignment fees to your brokerage. I'd recommend not holding positions through expiration unless they are far out-of-the-money. When you close a credit spread, you will buy back the spread in one transaction.

[@tylerbentley9653]

How about including some break even prices and some further explanation on what happens should the price of the stock fall somewhere within the spread at expiration?

[@Elemental1331]

So there's no possibility of getting assigned any shares with these strategies right?

[@jayssite]

You can get assigned on the short leg

[@ash3rr]

Great video. It would be great to give some real world examples of how to minimise the risk when things go south.

[@Stateofmind00]

This might be a repetitive or dumb question: will I also make profit on top of the Max profit potential as the price keep goin up say $115+ up stock price? and do you suggest 1 week expiration?

[@therealosas]

No.

[@gustavopierry]

Hey Chris, thanks for the video. Could you please share your comments why you think this is probably the only strategy viewers would ever need, as I think you mentioned in the beginning? I know it is a popular one due to its cost and simplicity. But risking 3 to make 1 sounds off to me. Is it popular because the capital required would be lower than investing in a directional long call or put? What’s your take on it? Thanks!

[@projectfinance]

Not credit spreads specifically, but vertical spreads are one of the only strategy categories you need. You can set up debit spreads (buying a vertical spread) with much more favorable risk/reward. I think they are great because they are highly customizable and have limited risk in the case of selling vertical spreads (credit spreads). Chris

[@elvd7437]

I have always lost each credit spread trade that I placed. What I do always is place a bear call/bull put spread and at the same time place a closing position with a limit order. Each time I use a limit to close a bear call to limit my loss in most cases $200 always end up in losses. What changes should I make to be profitable using this strategy?

[@lambodriver6983]

Great explanation on this strategy.

[@projectfinance]

thank you!

[@seanreilly1465]

Project Option: Thank you for the video. In the last example where you're discussing selling a bear credit spread for $1.90 net credit, what happens if TSLA stock price is at $316.00 at expiration? I would assume then that the 320 call that was purchased would expire worthless, and the 315 call that was sold would expire ITM. At this point, wouldn't the seller of this spread be assigned 100 shares of TSLA stock at $315 dollars? In this case, would you need $31,500 to purchase the shares or risk getting margin called by your broker? My concern here is the following: As long as one sells credit spreads and CLOSES the position (i.e. buys back the call that was sold initially, and sells the call that was purchased initially) PRIOR to the expiration date on the contracts, can one avoid assignment 100% of the time? I know that one can is at risk of "early assignment" when selling calls, which would cause problems with this strategy, and also means that in this case one would need $31,500 before selling this spread? Thank you again for the insight and I am looking forward to starting to sell credit spreads once I have this point cleared up.

[@projectfinance]

Sean, You're exactly right. If a trader sells the 315/320 call spread and TSLA is at $316 at expiration, the 320 call expires worthless and the 315 call is worth $1. If held through expiration, the trader would get assigned on the short 315 calls, and effectively short 100 shares of TSLA stock at $315/share (per short call contract). Yes, you would have margin issues if your account was not large enough to handle the margin requirement. In that scenario, you'd have to close the position immediately, otherwise, your brokerage firm will close it for you. You would not need $31,500 to sell this spread, and the risk of getting assigned early is very low. The most common scenario is if the short call is deep-in-the-money with very little extrinsic value and the stock was paying a dividend soon. Since TSLA does not pay dividends, early assignment should be very rare. Again, extrinsic value is the key metric to look at on your short in-the-money options. Lots of extrinsic value = virtually no risk of being assigned. Almost no extrinsic value = higher likelihood of assignment, but still low.

[@ethanluo7355]

if the call you sold are ITM at expiration you only need to pay the difference, in your case 100 dollars . the buyer who purchased call at 315 has 2 choice : he can accept 100 dollar or he can exercise , in either case he is dealing with the clearing agent not you

[@harshadsaraf9918]

So if we buy credit spread 1 week before instead of 45 , does Theta will impact credit spread?

[@Burns64363]

Nub question can you do this with weekly’s

[@arathaemaxus5250]

So, if you lose on this strategy, you end up owning stock because of the put you sold? Which means you can recover losses when the stock price goes up correct? Or if you’re in a losing position, you could exercise the put you bought on the last day by buying stock at the current price, sell the stock for profit using your put, buy stock from the put you sold, wait for the price to go up, sell the extra stock to recover. Did I get this right?

[@projectfinance]

You will only end up with long stock if you sell a put spread and ONLY the short put option is in-the-money when the options expire. If both the short put and long put are in-the-money and you hold the options through expiration, the short put assignment (+100 shares) and long put exercise (-100 shares) will offset and you'll end up with no shares. You'll still get charged exercise/assignment fees, however. Regarding the second scenario, you can't choose to buy shares of stock at the strike price of the put you've sold. The only time you have control of converting an option into shares of stock is if you own the option. Option buyers have the right to exercise while option sellers have the obligation to take the other side of that transaction IF the option is exercised and the option seller is assigned. Lastly, there aren't any quick profits to be made by purchasing shares at the current stock price and exercising your put to sell the shares. The reason for that is the put option you're exercising will be equal to or more than the value of that particular transaction, negating any risk-free profits. For example, if you own the 90 put option and the stock price is at $80, the 90 put will be worth at least $10 (the put's "intrinsic" value), which is the difference between the strike price and the stock price. In reality, the 90 put would likely be worth more than $10, and any of that additional (extrinsic) value will be lost when you exercise the put. Let's say the stock price is at $80 and the 90 put is worth $12. If you buy 100 shares at $80 and exercise your put option, you'd actually lose $200 because you sold your shares at $90 for a $10 gain on the shares ($1,000 gain on 100 shares), but you just lost your $12 put option ($1,200 in value) by exercising it and selling your shares. Personally, I think it may be helpful to approach options trading from the idea that traders buy/sell options in anticipation of profiting from the price changes in the options, not from converting the options into shares and making additional trades from there. I've been trading options actively for over 6 years now and I've only been assigned on short options maybe 2-3 times and exercised options fewer times than that. I know this may be very confusing so please feel free to reply with follow-up questions. I'm always happy to help those eager to learn! -Chris

[@arathaemaxus5250]

Ok so if I sell a put and the price drops. Is it still unlikely the buyer will exercise the put and assign me the shares? If not, I keep the money made from selling the put correct? If so then I’m assigned shares at the strike price? But on paper I can minus the money made from selling the put thus the actual price I paid could be considered a bit less. I then keep the shares until the price increases then sell those shares for profit?

[@arathaemaxus5250]

I’m just wondering if the put you bought could be used in some way to benefit rather than letting it expire. Or would the price need to drop severely for this to work?

[@projectfinance]

Getting assigned on a short option depends entirely on the amount of extrinsic value that exists in the option. If the stock price is only slightly below your put's strike price, it's likely the put option has lots of extrinsic value. For example, if the stock price is $89 and the $90 put is trading for $5, $1 of that is intrinsic and $4 of that is extrinsic. If somebody exercised that put option, they'd be flushing $400 down the toilet because an option buyer loses all the extrinsic value in the option when they exercise the option. If you are assigned on a short put, you'll end up with +100 shares per put you were assigned on. There are two ways to get assigned: the option buyer exercises the option and you are assigned OR you hold the short put option through expiration while the stock price is below the put's strike price. Your profit when selling a put option is the difference between the sale price and the final value of the option. If you sell a 75-strike put option for $4.00 and the stock price is at $74 at expiration, the put option will be worth $1.00 and you'll be assigned 100 shares. Your profit per put option would be $300 ($4.00 sale price - $1.00 final/expiration value) x 100 = $300. Then, you could hold onto those shares you got assigned and hopefully sell them back later at a higher price.

[@projectfinance]

If you sell a put spread, you do not want the stock price to decrease significantly, even though that would lead to a big increase in your long put option. However, since your short put option is at a higher strike price, the short put will be worth more than the long put, resulting in a net loss. You could potentially sell the long put on a stock price decrease and hope that the stock price increases later on, resulting in profits on your short put. I would not recommend this approach as selling the long put would increase your risk dramatically and may not work out as intended.

[@bizforall]

Please help: 1st Trade I’m sitting on Call Credit Spread. Not sure what to do next. SPY $471/$472 Calls $0.59 @ -63.89%. Exp date 1/7/22 Stock is already at $471 now. Should I wait until it expires of Close credit spreads? ------ 2nd Trade I’m sitting on Put Credit Spread. Not sure what to do next. BABA $115/$110 Puts $0.94 @ +3.09%. Exp date 12/31/21 Stock is already at $125.15 now. Should I wait until it expires of Close credit spreads?

[@riseuplight]

So what's holding me back from closing the credit spread before expiration? According to the one I have open now, if I close it now I will receive the amount remaining when subtracting the premiums amounts. Therefore, it would be the maximum profit according to your explanation...

[@projectfinance]

You can close the spread whenever you want. The maximum profit occurs if the spread's price is $0.00. What did you sell the spread for initially?

[@GeronimoLogistics]

why and when would you set up a spread when one strike is above and below te stock price? You are putting them both below?

[@projectfinance]

Hi Seth, When trading credit spreads (selling call spreads or selling put spreads), it's common to place both strikes "out-of-the-money." For call spreads, that means both strikes of the spread are above the stock price. For put spreads, that means both strikes of the spread are below the stock price. The only time I trade spreads with one strike in-the-money and one strike out-of-the-money is if I'm buying a call spread or put spread (sometimes referred to as debit spreads). Does this help? Please let me know if you need more clarification. Happy to help. -Chris

[@fabianrichburgh6517]

Curious, but isn’t the risk always higher than the rewards? Almost by 100 recent each time..

[@teddysimmon9317]

I would love to know about this topic but this guy is a speed talker that few can grasp!

[@shobra1234]

Good job and thank you

[@kishanpatel1119]

is there any negative or positive impact doing this on a weekly basis ?

[@brentbecroft2890]

Great explanation, thank you. One question, what MA crossover period do you use for your charts?

[@mannylewis3548]

The best explanation I’ve yet to hear on credit spreads!! Kudos 💯

[@nickgarcia153]

Why would you use a credit spread instead of a debit spread, if the risk to reward ratio is so much better on a debit spread?

[@MT-qq1rq]

Everything has a trade-off. Debit spread higher reward but lower probability of success. Credit spread lower reward but higher probability of success.

[@nickgarcia153]

@@MT-qq1rq How is it a higher probability? That’s determined by where you place your calls and puts, not weather or not you use a debit or credit spread?