Option credit spread trading limited risk with limited profit


The break-even point for the call credit spread option strategy is always calculated by adding the net premium received to the strike price of the short call. Call credit spreads are fantastic trades to place if you want to take advantage of time decay and limit the potential max loss for the position. This is truly where the call credit spread option strategy shines. If if the underlying asset rises slightly, the position will make money, depending on how far OTM the credit spread is.

And, of course, if the underlying asset completely crashes or moves down slightly, the position will make money. Essentially, call credit spreads are a hedged version of the short call option strategy. In fact, many traders initiate a short call and later hedge the position by purchasing a long call. The primary goal with a call credit spread is to capture all of the premium received from placing the trade, so the main reason traders implement this strategy is to express a truly bearish perspective.

Since this is a risk-defined trade, the amount of buying bower required to employ the call credit spread option strategy is always equal to the max loss minus the premium received for placing the trade. Regardless of the direction the underlying asset moves, time premium will come out of the short option leg of trade. The long call, however, will also lose value do to time decay. Since the long call is always further away from the short call, theta decay will always be greater for the short call and therefore offset the theta from the long call.

As a general rule, call credit spreads should always be closed out when the premium for the spread approaches zero before expiration. A great tactic eliminate risk for an already profitable call credit spread is to only close out the short call part of the spread.

In essence, the remaining long call becomes a free-ride. As with all vertical options spread strategies, there is always a risk that the underlying asset will fall between the short and long strikes of the spread at expiration. If the short option credit spread trading limited risk with limited profit expires in-the-money and the long option credit spread trading limited risk with limited profit expires out-of-the-moneyoption credit spread trading limited risk with limited profit potential assignment risk exists.

Technically, an assignment risk exists for stock option sellers anytime a short option is ITM, although this is very rare. You can mitigate expiration risk by monitoring call credit spreads that are near-the-money the day of expiration.

The call credit spreads is a really interesting options trading strategy. As with all options spreads, exchange fees and commissions can quickly add up, so always be mindful of how much you have to pay in transaction costs for opening and closing spread trades.

Options Bro April 1, Why Trade Call Credit Spreads? Margin Requirements for the Call Credit Spread Option Strategy Since this is a risk-defined trade, the amount of buying bower required to employ the call credit spread option strategy is always equal to the max loss minus the premium received for placing the trade. What about Theta Time Decay? Theta decay works in favor of a call credit spread. Anything I should know about Expiration? Important Tips The call credit spreads is a really interesting options trading strategy.