Playing the "somewhats"
by Len Yates
Tired of waiting for the market to do something significant and you want to steer clear of naked
writing? This article describes a way to play what I call the "somewhats" — times when you expect the
market to go somewhat higher or somewhat lower.
There is a very good strategy to apply in times like this. It's called a "credit spread" or "vertical credit
spread," and it has two distinct advantages: You can profit handsomely from a modest change in the
underlying security and, if you choose out-of-the-money options, time is on your side. While you're
waiting for the move you expect from the underlying security, the natural time decay of options is
working in your favor.
A credit spread is created when you sell options and simultaneously buy the same quantity of options in
the same expiration month, but farther out-of-the-money. Because you are selling options that have a
higher price than the ones you are buying, the result is a net credit to your account, hence the name credit
The brokerage requirement for a credit spread is equal to the difference in strike prices times 100. For
example, if you put on a 5-point credit spread, the requirement would be $500. However, the proceeds of
putting on the position help to offset this requirement, with the result that a credit spread is a relatively
cheap strategy to implement.