Before trading, read below and watch the below videos. This will show you how to approach trading credit spreads like a Master Trader.
Money Management, Trade Management and understanding the use of Contingent Orders is of vital importance to your success.
Many overlook these and most options trading services ignore the use of stop-loss orders. Rather, they "roll" or extend losing trades into the future in "hope mode."
We rarely do this unless the chart pattern supports the adjustment.
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Master Trader specializes in selling credit spreads around compelling patterns as Income Trades because we literally get paid for determining where a stock or ETF is not going in a short amount of time.
The time decay (which is a “drag” to option buyers) favors selling them to the novices – particularly at extreme moves of fear and greed where volatility spikes.
These trades are for those wanting to generate weekly income from high probability short-term option selling, including news, gaps, earnings, and volatility trades around compelling chart patterns.
Whatever the broader markets are doing – trending, whippy, or choppy – we find compelling credit spread opportunities around the charts for generating monthly income.
Although we have an impressive 85% success rate in trading these short credit spreads, proper money and trade management is critical to success since you don’t want a few losses to disproportionally wipe out your gains.
In this Video, Money Management Considerations When Selling Option Credit Spreads for Income, we will discuss:
- General Money Management Considerations
- Calculating Proper Contract Size per Your Trading Plan
- A Word on Probabilities and Max Loss
- Managing Short Credit Spread Positions
- Taking Stop Losses on Short Credit Spreads Based on Various Stops
Money Management Considerations When Selling Option Credit Spreads for Income
Master Trader wants you to succeed at selling credit spreads using the Master Trader Method (MTM).
This information will help you do that with proper money management -- and not suffer large unexpected losses towards your journey to trading mastery.
If you want to master this high-probability option-income strategy to regularly sell credit spreads around the charts for weekly and monthly income, you need to take our Mastering Advanced Credit Spreads course now. Course Descriptions and Order at: https://mastertrader.com/SpreadTrader
The Video Estimating Stop Out Amount on Credit Spreads will discuss an easy way to estimate the stop-out amount if your stop is hit and how to calculate the proper number of contracts based on your pre-determined Max Loss.
Estimating Stop Out Amount on Credit Spreads
We encourage you to watch both videos to gain a better understanding of risk management in shorting credit spreads for income.
Now that you have watched the Video let’s discuss possible contract size using a hypothetical $100,000 account. Divide all these numbers by 10 if you have a $10,000 account.
- If you sold the Put Spread for $.80/share, the estimated amount to close it if SPY hit your $3 stop at $277 was $1.25/share, which would be a $.45/share loss.
- If your Trading Plan says you can risk one-half of 1% of account size per credit spread, then you could trade 11 contracts ($500/.45 = 1,111 shares, round down to 1,100, and divide by 100 since 1 contract represents 100 shares of the underlying).
- Conservative traders using the lower number of contracts based on this estimate or 3x Credit Received could trade 3 contracts ($500/(2x .80/share credit received) = 312 shares). Note: When we say if you want to use the larger loss estimate or 3x Credit Received in this example, that means you would be closing it at 3x $.80/share received = $2.40/share to close; however, you already received $.80/share, so your net loss is still only 2x of credit received, or $1.60/share.
Since one (1) contract is the smallest option contract you can trade, if your account size does Not permit you to place the trade per your Trading Plan, don’t trade it. But always feel free to paper trade any trade to increase your level of understanding and learning.
Next, watch this Video, Placing Contingent Option Orders on TOS – MasterTrader.com.
It will show you how to place a contingent order on ThinkorSwim (TOS) to close out a credit spread based on a stop being triggered on the underlying stock or ETF, which is the methodology taught and used by Master Trader.
The TOS platform is not required to trade credit spreads successfully and any “Good” trading platform will have a contingent order function.
Placing Contingent Option Orders on TOS – MasterTrader.com
Note on Option Spreads
Do not trade options with wide spreads. You want to trade liquid options, which are those with high trading volume and open interest. You want tight bid-ask spreads (e.g., QQQ typically only 1-cent). Option spreads will usually also be greater with more expensive stocks. Ideally, it is best if they are not more than $.10.
The FastTrack to trading credit spreads is the Mastering Advanced Credit Spreads Course.
However, if you're on a tighter budget, start with the Advanced Credit Spread Course
