V.6:12 (470-471): Playing the "somewhats" by Len Yate

V.6:12 (470-471): Playing the "somewhats" by Len Yate
Item# \V06\C12\PLAYING.PDF
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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 spread.

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.




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