Put Credit Spreads Explained

Put Credit Spreads Explained | Coffee With Markus | Episode 59

0:00 Introduction
1:50 Stock Market Recap
15:00 Put Credit Spreads Explained
33:30 Question and Answers
Trading a credit spread means you’re being credited for selling a put option contract. And at the same time, debited for buying a put option contract as protection. You keep the n

I like to contrast trading credit spreads with trading outright puts options.

Boeing just announced some big news about their 737 Max and traders are loving this stock right now!

Let’s say that you do NOT expect Boeing to move below its current strike price of $194. Because you are expecting Boeing stock to increase in price, you are going to sell a put at a strike price at $160.

By selling this put option you would be able to collect a premium AND you’ll be able to KEEP this premium if Boeing stays above $160.

In this particular example, we’re going to sell 160 Exp 8/21 put contracts. Our maximum reward for this credit is $800. Because I’m trading in a margin account in Tasty Trade, I’m only required to have $1,610 in margin.

It’s important to note that selling a put contract could have a potential max loss of $15,200. This means that if the stock price went to zero, you could theoretically lose $15,200.

You might be saying to yourself right now “that’s a lot of risk for only $800... “.

But, there is some good news. The probability of profit for this trade is 74%! That means that there is a 74% chance that Boeing will stay above $160 at contract expiration.

Why should you trade credit spreads?

This is a great question! Trading credit spreads can reduce the potential liability of your position. It can also greatly reduce the margin requirements for the trade. This means less risk for you, and more capital for other positions.

How is this possible?

We’ll let’s examine the put option contract we just purchased on Boeing. Selling this put option contract netted my account $800. But this position also required $1,610 in margin and had a potential risk of $15,200.

If we purchase an additional put option at the $155 strike price for the same expiration date, it will do several things. Purchasing an additional put option contract will reduce the margin requirement to only $370. It will also reduce your maximum risks to $500 dollars per contract. Purchasing a put option costs money so it will decrease the overall profitability of the trade. In this instance, purchasing the $155 put option costs $670. This will bring the net credit of this position down to $130.

Purchasing a put option will also raise the break-even point to $158.70 from $152.
This means that the trade is no longer profitable if the strike price moves below $158.70.

This brings me to my next point!

When to trade this strategy

You trade the put credit spread strategy when you are bullish on the underlying stock. If you believe the stock is increasing in price, a put credit spread is a higher probability position to take than a directional call.

An important thing to remember is that put credit spreads should ALWAYS be closed before expiration.

When a put option contract is sold and the strike price falls below the put option contract, you are at risk of assignment. If you are in a put credit spread and the put option you sold is in the money (ITM) you should close the position immediately.
================================================================================
✅ First, subscribe to my channel here so you never miss a new video: https://bit.ly/3aLKLDz
📈 Watch My Daily Trading Routine Here (that takes me less than 15 min/day): https://bit.ly/2ICZkgX
📕 Get a FREE Hardback Copy Of My New Book “The Wheel Options Trading Strategy”: https://tinyurl.com/bvxjjz7k
💻 Need a broker? We prefer trading using Tradier! Sign up here: https://bit.ly/3uw3RaG
🌍 Outside of the U.S.? Check out Interactive Brokers' amazing platform: http://rockwelltrading.com/ibkr
☕️ Start your morning just like Markus, with the MorningBrew Newsletter: https://bit.ly/32Xs6Uu
================================================================================
tastyworks, Inc. (“tastyworks”) has entered into a Marketing Agreement with Rockwell Trading Services, LLC whereby tastyworks pays compensation to Rockwell Trading Services, LLC to recommend tastyworks’ brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Rockwell Trading Services, LLC by tastyworks and/or any of its affiliated companies. Neither tastyworks nor any of its affiliated companies is responsible for the privacy practices of Rockwell Trading Services, LLC or this website. tastyworks does not warrant the accuracy or content of the products or services offered by Rockwell Trading Services, LLC or this website. Rockwell Trading Services, LLC is independent and is not an affiliate of tastyworks.

Видео Put Credit Spreads Explained канала Markus Heitkoetter