Credit Spread | ONLY RISK $50 (Beginners)

Summary

This video tutorial focuses on the strategy of trading put credit spreads with minimal risk, aiming for high returns. The presenter shares insights on selecting stocks with strong support levels and demonstrates how to manage and adjust credit spreads for optimal profit. Key takeaways include the importance of choosing the right spread width, understanding risk management, and leveraging time decay to maximize returns. The video also touches on rolling positions to mitigate losses and the psychological aspect of trading, emphasizing the need for balance and learning from experience.

Takeaways

• 💼 The video discusses a strategy for trading put credit spreads with a focus on risking small amounts of capital for potentially high returns.
• 📈 The speaker shares a personal example of making $5 with a risk of $35, highlighting a return of about 40-50% in a 43-day period.
• 📊 The importance of choosing stocks with strong support levels is emphasized for managing risk effectively in credit spread trades.
• 📉 The video explains the concept of bid-ask spread and how market conditions, such as the time of day, can affect it, impacting trade decisions.
• 💹 The presenter suggests aiming for a $5 width in credit spreads as a 'sweet spot' that balances return and risk, drawing from personal experience and research.
• ⏱️ A preference for expiration dates of two to six weeks is mentioned, noting the middle ground as a 'sweet spot' for credit spread trades.
• 🏦 The video references the speaker's experience from Wall Street and Goldman Sachs, advocating for selling out-of-the-money options as a reliable strategy.
• 📚 Risk management is highlighted as crucial, with a call for understanding position sizing and asset allocation, drawing a parallel to the importance of risk management in finance.
• 💬 The video touches on the psychological aspect of trading, discussing the need for intuition, experience, and learning from mistakes, akin to skills needed in sports or art.
• 🔄 The concept of rolling positions is introduced as a strategy to manage losing trades, with a detailed example using Tesla stock to illustrate the process.
• 💰 The video concludes with advice on holding positions until expiration to benefit from time decay, a key factor in option pricing.

Q & A

What is the main strategy discussed in the video for trading put credit spreads?

The main strategy discussed in the video is trading put credit spreads with a focus on risking very little money for potentially high returns. The speaker emphasizes the importance of choosing stocks with strong support levels and selling tight spreads with a $5 difference for a good return-to-risk ratio.

What is the potential return and risk in the example trade mentioned at the beginning of the video?

In the example trade, the potential return is $5, and the risk is $35, which would result in a return of about 40%, almost 50%, in about 43 days.

Why does the speaker prefer to open spreads that are about $5 in difference?

The speaker prefers $5 spreads because they have found it to be a sweet spot that offers a good balance between return and risk. This approach helps to minimize the impact of a single losing trade on the overall portfolio.

What is the significance of the bid-ask spread in the context of the video?

The bid-ask spread is significant because a wide spread can make it difficult to execute trades at desired prices, especially for tight spreads. The video mentions that the bid-ask spread is wide at the market open, which is not indicative of the typical spread and can affect the execution of the trade.

Why does the speaker recommend looking for stocks with strong support levels when trading put credit spreads?

The speaker recommends looking for stocks with strong support levels because these stocks are less likely to drop significantly, reducing the risk that the stock price will fall into the strike zone of the sold put option, which could lead to a loss.

What is the 'sweet spot' for expiration dates when trading put credit spreads according to the video?

The 'sweet spot' for expiration dates when trading put credit spreads, as mentioned in the video, is between two to six weeks. This timeframe balances the risk and return effectively.

How does the speaker manage the risk when selling put credit spreads?

The speaker manages risk by choosing stocks with strong support, selling out-of-the-money options, and using appropriate position sizing and asset allocation. They also emphasize the importance of not putting too much capital into a single position to avoid significant losses.

What is the role of Delta in the strategy discussed in the video?

Delta plays a crucial role in the strategy as it represents the probability of the option being profitable at expiration. The speaker discusses aiming for options with a 20 Delta or even less, which indicates a higher chance of the option expiring out of the money, thus increasing the win rate.

Why does the speaker advise holding the position until expiration instead of closing it early?

The speaker advises holding the position until expiration to allow time decay to work in the trader's favor. As the option loses time value, it becomes cheaper, which can lead to a profit when buying back the option, especially for a selling strategy like a put credit spread.

What is the speaker's approach to rolling a put credit spread, and when might it be necessary?

The speaker's approach to rolling a put credit spread involves closing the current position and opening a new one with different strike prices, typically lower, to maintain a position that is out of the money. Rolling might be necessary if the stock price is falling and the current position is at risk of assignment or significant loss.