Futures For You by Carley Garner
LIMITING YOUR RISK
I like the idea of selling futures options due to what seems like better odds than buying them, but I donít like the idea of unlimited risk. How can I collect premium in the commodity markets with limited risk?
The strategy you are referring to is known as credit spread trading, sometimes referred to as an iron condor. In essence, it is the practice of selling options along with the purchase of insurance, which comes in the form of a long option with a distant strike price. If a trader sells a call option and purchases a call option in the same commodity and expiration month but a higher strike price, he has executed a credit spread. Keep in mind that options are versatile and there are an unlimited number of spread strategies that result in a credit (cash inflow), causing them to be referred to as credit spreads. However, the specific type we are discussing is the most common.