Professional Advanced

Options Trading Course

Lesson 2: Credit Spreads

Adam Khoo Bang Pham Van

Professional Trader Options Trader & Specialist

www.piranhaprofits.com
www.wealthacademyglobal.com
 Credit Vertical Spreads

How to Create Regular Income with Limited Risk

Strategy 1A: Strategy 1B:

Sell Call Sell Put
Spread (Bear) Spread (Bull)

Buy further OTM Call ( To Limit the Risk)

Same
expiration
Sell OTM Call (Collect Premium)

Sell OTM Put ( Collect Premium) Same

expiration
Buy Further OTM Put (To Limit the Risk)
 Strategy 1A: Sell Call Spread (Bear)
When to Deploy: The Strategy
• Neutral to Bearish Outlook Sell an OTM Call & Buy a
• Anticipate Asset Price will Move Higher Strike Call with Same
Sideways or Down Expiration

Optimal Technical Pattern

• Low Momentum Stock (Falling relative strength) Where…
• Price Breaking Down from Consolidation
• Price Bouncing off Resistance on a downtrend
• Price at the Top of a Range (Downtrend Bias)

Sell Call Spread

Sell Call Spread Sell Call Spread

 Sell Call Spread (Bear)
Example: Neutral to Bearish on CAR at $28

$28.00
 Sell Call Spread (Bear)
Example: Neutral to Bearish on CAR at $28
• Short 1 Contract CAR March 32 Calls at $0.48 (Premium Received)
• Long 1 Contract CAR March 34 Calls at $0.20. (Premium Paid)
• Max Profit = (Premium Received - Premium Paid) x 100 = (+$0.48 - $0.20) x 100
= $28 per contract
• Max Risk = (Long Strike - Short Strike - Net Premium) x 100
= ($34-$32- $0.28) x 100 = $1.72 x 100 = $172
 Sell Call Spread (Bear)
Example: Neutral to Bearish on CAR at $28

Net $28 Pay -$20 Long Mar 34 Call

Collect +$48 Short Mar 32 Call

$28.00
82.85% Probability Win
 Sell Call Spread (Bear)
Example: Neutral/ Bearish on CAR at $27.61
• Sell 1 Contract CAR March 32 Calls at +$0.48
Sell Call Spread 32/34
• Buy 1 Contract CAR March 34 Calls at -$0.20
Net premium Received = $0.28

1 Contract Bear Call Spread 32/34

Profit

Breakeven ($32.38)

Long
Max Profit= +$28 Call
(Net Premium
Strike
Received)
0
$32 $34 Stock
Short price
Call Risk-Return Today
Strike
Max Risk= -$172
(long strike- Risk-Return at Expiration
short strike-
net premium)
Breakeven Price ( Short Strike + net Premium) = $32 + $0.28 = $32.28
Loss
 Steps to Sell Call Spread (Bear)
1.Identify a Neutral/Bearish Trade on a Stock/ETF, Index or Futures
• (See Lesson on Technical Analysis)
2.Check the Option Chain
• Ensure IV Percentile is 40-50 or more. Ensure Earnings not within Expiration date
• Choose Date to Expiration. 45-60 Days is Ideal
• Choose Short Call Strike Price
• I prefer Delta of (0.20 to 0.25). This gives a 75%-80% Win Probability
• Choose Long Call Strike price
• Long Call Strike Price 1-2 Strikes Above Short Call Strike
• Choose Quantity (minimum 1 Contract = 100 Shares)
• 20% of Max Loss < 2% of Your Net Liquidation
3.Analyse your Risk- Return Profile
• Check your potential loss or profit at different prices, 15 days to expiration and
at Expiration
4.Ensure Bid/Ask Spread of Options not more than $0.40-$0.50
• Sell the Vertical Combo Short Call/Long Call
• Place a Limit Order at Mark When the Market is Open
 Trade & Risk Management
• Monitor your trade Performance at least once a day
• When the Delta of your short call goes above 0.35 to 0.40, you have
to a) Adjust your trade (If there is more than 30 days to Expiration)
or b) close the trade to cut loss (Less than 30 days to expiration)
• Don’t let the delta go beyond 0.35 to 0.40
• This way, you limit your risk to 20% of the Maximum Loss

Profit

Stock Price

Loss
 How to Adjust Your Trade
(1) Close The Original Bear Call Spread Buy Mar 36 Call
• Buy to Close the Short Call Sell Mar 34 Call
• Sell to Close the Long Call
Buy Mar 34 Call
(2) Open a New Bear Call Spread at Higher Strike Prices Sell Mar 32 Call
• Sell A New Short Call $30
• Buy a New Long Call

Stock Price $28

Both (1) and (2) can be executed in one order: In the thinkorswim
platform…
• Go to Monitor / Activities and Positions / Position Statement
• Highlight the two options that need to be adjusted
• Right click / Create rolling order / <choose the first option>
• Adjust the strikes – new short call should have 20~25 delta
• [Optional] the new Call Spread could have the same or a different Expiration
Date (More than 30 Days)
 Advantages and Risks of Bear Call Spread

• Advantages:
• High Probability of Winning (> 75%-90%)
• Benefit from Time decay
• Profit when the stock price moves up slightly, sideways or down
• Disadvantages:
• Maximum Profit is capped at the premium collected
 Strategy 1B: Sell Put Spread (Bull)
When to Deploy:
• Neutral to Bullish Outlook
• Anticipate Asset Price will Move
Sideways or Up
The Strategy
Optimal Technical Pattern Sell an OTM Put & Buy a Lower
• High Momentum Stock (Rising Relative Strength), Strike Put with Same Expiration
Uptrend Stock Where…
• Price at support level of Consolidation
• Price Breaking Out from Consolidation
• Price Bouncing off Support on Uptrend

Sell Put Spread Sell Put Spread

Resistance

Sell Put Spread

 Sell Put Spread (Bull)
Example: Neutral to Bullish on SAVE at $60.93

$60.93
 Sell Put Spread (Bull)
Example: Neutral to Bullish on SAVE at $60.93
• Short 1 Contract SAVE March 57.5 Puts at $0.98 (Premium Received)
• Long 1 Contract SAVE March 55.0 Puts at $0.48. (Premium Paid)
• Max Profit = (Premium Received - Premium Paid) x 100 = (+$0.98 - $0.48) x 100
= $50 per contract
• Max Risk = (Short Strike - Long Strike - Net Premium) x 100
= ($57.5-$55- $0.50) x 100 = $2.00 x 100 = $200
 Sell Put Spread (Bull)
Example: Neutral to Bullish on SAVE at $28

74% Probability Win $60.93

Collect +$98 Short Mar 57.5 Put

Net $50
Pay -$48 Long Mar 55.0 Put
 Sell Put Spread (Bull)
Example: Neutral/ Bullish on SAVE at $60.93
• Sell 1 Contract SAVE March 57.5 Puts at +$0.98 Sell Put Spread 57.5/55
• Buy 1 Contract SAVE March 55.0 Puts at -$0.48 Net premium Received = $0.50

1 Contract Bull Put Spread 57.5/55

Profit
Breakeven ($57)
Short
Put
Strike Risk-Return at Expiration
Max Profit= +$50
(Net Premium
Risk-Return
Received) $57.5
$55 Stock Today
price
Max Risk= -$200
(Short strike-
Long
long strike- Put
net premium) Strike

Breakeven Price ( Short Strike - net Premium) = $57.5 - $0.50 = $57.00

Loss
 Steps to Sell Put Spread (Bull)
1.Identify a Neutral/Bullish Trade on a Stock/ETF, Index or Futures
• (See Lesson on Technical Analysis)
2.Check the Option Chain
• Ensure IV Percentile is 40-50 or more. Ensure Earnings not within Expiration date
• Choose Date to Expiration. 45-60 Days is Ideal
• Choose Short Put Strike Price
• I prefer Delta of (0.20 to 0.25). This gives a 75%-80% Win Probability
• Choose Long Put Strike price
• Long Put Strike Price 1-2 Strikes Below Short Put Strike
• Choose Quantity (minimum 1 Contract = 100 Shares)
• 20% of Max Loss < 2% of Your Net Liquidation
3.Analyse your Risk- Return Profile
• Check your potential loss or profit at different prices, 15 days to expiration and
at Expiration
4.Ensure Bid/Ask Spread of Options not more than $0.40-$0.50
• Sell the Vertical Combo Short Put/Long Put
• Place a Limit Order at Mark When the Market is Open
 Trade and Risk Management
• Monitor your trade Performance at least once a day
• When the Delta of your short put goes above 0.35 to 0.40, you have
to a) Adjust your trade (If there is more than 30 days to Expiration)
or b) close the trade to cut loss (Less than 30 days to expiration)
• Don’t let the delta go beyond 0.35 to 0.40
• This way, you limit your risk to 20% of the Maximum Loss

Profit

Stock Price

Loss
 How to Adjust Your Trade
(1) Close The Original Bull Put Spread Stock Price $60.93
• Buy to Close the Short Put
• Sell to Close the Long Put
$58.93
Sell Mar 57.5 Put
(2) Open a New Bull Put Spread at Lower Strike Prices
• Sell A New Short Put Buy Mar 55.0 Put
• Buy a New Long Put
Sell Mar 55.0 Put
Buy Mar 52.5 Put

Both (1) and (2) can be executed in one order: In the thinkorswim platform…
• Go to Monitor / Activities and Positions / Position Statement
• Highlight the two options that need to be adjusted
• Right click / Create rolling order / <choose the first option>
• Adjust the strikes – new short put should have 20~25 delta
• [Optional] the new put Spread could have the same or a different Expiration Date (More than
30 Days)
 Advantages and Risks of Bull Put Spreads

• Advantages:
• High Probability of Winning (> 75%-90%)
• Benefit from Time decay
• Profit when the stock price moves down slightly, sideways or up
• Disadvantages:
• Maximum Profit is capped at the premium collected
 Professional Advanced
Options Trading Course
Lesson 2: Credit Spreads

Adam Khoo Bang Pham Van

Professional Trader Options Trader & Specialist

www.piranhaprofits.com
www.wealthacademyglobal.com