Special

Topic
Option Strategies:
Credit Spreads
Brian Houston, Nison Cer0fied Trainer™

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 Brian has been trading stocks for over 37 years, and
has devoted much of his trading career to trading
options and creating options strategies.

During that time, he has used Steve Nison's candlestick

patterns and education to continually improve his
knowledge and skills.

Recently, Brian has has also added Elliott Wave theory

to his set of trading tools, CFDs in Forex, Indices and
Gold.
Brian Houston,
Nison Cer0fied Trainer ™

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 Which Markets

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 Your Favourite Market

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 Trader’s Slang
•  Bull Market

•  Bear Market

•  Support

•  Resistance

•  Trend
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 Trader’s Slang
•  Windows – both rising and falling
•  Lagging Indicators!
•  Oscillator – MACD, Stochas0cs
•  Moving Averages
•  Candles and their colours
•  BEAR Calls
•  BULL Puts

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 Leverage

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 The Mul1plier Effect
Where a Nison candle signal confirms another indicator

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 Option Credit Spreads
Bear CALL Spreads Bull PUT Spreads
•  A Credit is where the trade puts money into your account!
•  Remember, your broker will usually hold addi0onal money
towards a possible trade gone wrong
•  In the same month
•  BUY a higher strike price BUY a lower strike price
•  SELL a lower strike price SELL a higher strike price
•  Ensure you sell the same number
•  Gains are limited to your credit
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 Option Credit Spreads
Bear CALL Spreads Bull PUT Spreads

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 Option Credit Spreads
•  Poten0al RISK is also limited!
•  The spread on the strike prices – your credit
Example:
Buy GE Call $28 Strike = $0.30
Sell GE Call $26 Strike = $1.00
Credit = $0.70
$2 Strike difference – 0.70 therefore RISK = $1.30

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 Option Credit Spreads
•  So why do we use Credit Spreads?
•  The market is not expected to move much
•  You want to limit your poten0al loss
•  But looking to scalp the market 0me premium!
•  Breakeven
Bear Call Spread * net premium + lower strike price
Bull Put Spread * higher strike price - net premium

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 Option Credit Spreads
There are s1ll 3 Strategies – Calls Puts
•  In the Money (bearish market) Bullish
•  At the Money (neutral to bearish market) Bullish
•  Out of the Money (slightly bearish market) Slight bullish

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Bullish Engul?ing Pattern at Support

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How NOT to use candlesticks
Oh my goodness! The
market rallied after the
shooting star!

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 Option Credit Spreads
•  They are the same expira0on 0meframe
•  Can be created for any number of days, weeks or months into
the future (expira0on)
•  Have an equal number of contracts on the buy and sell side
•  Work in all markets trading op0ons
•  Higher vola0lity stocks can have larger profit poten0al (and
loss)
•  Can be kept to expiry or closed early!

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 Bear Call - Credit Spread
•  Market has risen
•  Appears to have found resistance
•  Long upper shadow
•  Stochas0cs turned down

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 Bear Call - Credit Spread

Buy 120 Jun 19 $3.10

Sell 115 Jun 19 6.00
•  Credit $2.90

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 Bull Put - Credit Spread
•  Market has fallen
•  Appears to have found support
•  Long lower shadow
•  Stochas0cs turned up

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 Bull Put - Credit Spread

Buy 115 Jun 19 $4.40
Sell 120 Jun 19 6.70
•  Credit $2.30

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 In The Money Credit Spread
•  Call Credit Spread
•  Bearish trade
•  BUY 110 = $ 9.30
•  SELL 100 = 18.00
$10 Spread $8.70

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 Bear Call - Credit Spread in Detail
•  You buy the less expensive Call
•  You sell the more expensive Call
•  Do this simultaneously
•  Are you conserva0ve in nature or more aggressive?
•  ITM, ATM or OTM trades
•  How many strikes spread do you want?
•  Remember to check open interest on the the op0ons
•  Comfort level with vola0le stocks?

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 At The Money Bear Call Spread
•  Call Credit Spread
•  Conserva0ve trade
•  BUY 120 = $3.00
•  SELL 115 = 5.80
•  $5 $2.80
•  Breakeven = 115 + 2.80 =
117.80
•  Poten0al profit 2.80
•  RISK: $5 – 2.80 = $2.20
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 Out of the Money Bear Call Spread
•  Call Credit Spread
•  Conserva0ve trade
•  BUY 130 = $0.45
•  SELL 120 = $3.00
•  $10 $2.55

•  Breakeven = 120 + 2.55 =

122.55
•  Poten0al profit $2.55
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 Roll Out Your Spreads
•  If there is 0me and your 0me premium has not decayed excep0onally!
SELL 120 JUN and BUY 120 JUL
BUY 115 JUN and SELL 115 JUL
•  New Cost / credit?

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 Bull Put – Credit Spread
•  Bull Put Spread suggests upward
pressure on the market
•  Maybe you’re stuck in a trading
zone, with a posi0ve sen0ment
•  Determine how posi0ve the
market indicates versus your 0me
frame!

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 CAT

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 Bull Put – Credit Spread
•  CAT = $112.50
•  Consider 1 week op0ons
•  Some room for oscilla0on
•  Sell 117 (1wk) $4.90
•  Buy 115 (1wk) 3.50
•  Credit $1.40
•  Poten0al Gain $1.40
•  Bullish expecta1on

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 Compare and Contrast
Consider Calls
•  $1 spread
•  Buy 114 1.35
•  Sell 113 1.80 = $0.45 Cr & Risk 0.55

•  $5 spread
•  Buy 113 1.80
•  Sell 108 5.22 = $3.42 Cr & Risk 1.58
Risk is different too!

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 Bull Put – Credit Spread in Detail
•  Bull Put Credit Spreads are simply the same as Bear Call
Spreads (in Puts instead of Calls)
•  You buy the less expensive Put (deeper out of the money)
•  You sell the more expensive Put
•  Do this simultaneously
•  Are you conserva0ve in nature or more aggressive?
•  ITM, ATM or OTM trades
•  How many strikes spread do you want? Remember to check
open interest on the the op0ons
•  Comfort level with vola0le stocks?

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 Decision Time
•  What is your Risk versus Reward tolerance
•  Credit Spread trading has limited reward poten0al but
some0mes great percentage
•  Big Ques0on: ITM, ATM or OTM
•  In the Money
•  At the Money
•  Out of the Money
•  This all relates to the expected market direc0on within a
par0cular 0me period!

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 Added Tips
•  The Credit Spreads works amazingly well in all consistent and
predictable markets
•  Gentle upwards movement, flat and gentle downwards
movement
•  Remember to control the 0ming of your trade
•  If possible, allow your op0ons to be called away for cash
•  Be comfortable with your Support and Resistance lines!

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 Quick Summary
•  Credit Spreads
•  Bear Call
•  Bull Put
•  Buy your less expensive strikes
•  Sell the more expensive strikes
•  Done simultaneously
•  Will depend upon expected market movement next BUT
•  Can be done with PUTS or CALLS
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 Quick Summary
•  Take advantage of Time Premium decay

•  Know your Major Support and Resistance areas

•  You must s0ll have a mental stop area where you exit all

•  Consider how long it might take for the market to move

•  Roll out your op0ons depending on market condi0ons

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