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