There are many ways to trade stock options. Each type of options trade has pros and cons. But when all is said and done, the best trade in most cases is a credit spread. Now I can just hear haters jump up and down and criticize the credit spread because the risk/reward isn’t stellar. But “Haters gonna hate…” What is a credit spread? A trade that can have outstanding probability. And while you may not make a zillion dollars next week with a credit spread, odds are you will show a consistent profit. And that’s the name of the game. The credit spread is the best trade there is.
Now a credit spread can sound pretty complicated, but I’ve developed an easy way to explain what’s going on. I have written a report that explains how I trade credit spreads. You can just click the link and grab it. It’s free.
My favorite way to use a credit spread is what I call the Insurance Agent Trade. It goes like this. Suppose you have 100 shares of Amazon stock, and you’re a bit concerned to have $38,000 in one bucket, so you decide to buy some insurance. If you own a house, you buy homeowners insurance to protect your investment. If you own AMZN stock, you can also protect your investment
Since I am an insurance agent, I happily sell you some insurance. The insurance policy for stock is called a Put option. So you buy a Put option from me, your insurance agent. You decide you want a $2000 deductible insurance policy, so I sell you an Oct 360 Put option for $2500. By selling you that insurance, I have an obligation to buy your 100 shares of AMZN for $360, even if AMZN goes to zero. For you, the most you can possibly lose is $2000. Even if AMZN goes to zero, you can sell your shares to me for $360.
But I’m a little concerned that I might have to pay a bunch of money if AMZN goes way down, so I buy my own insurance. I buy an Oct 340 Put option that gives me the right to sell 100 shares of AMZN for $340. I pay $1800 for that insurance policy. The pair of option trades together is called a credit spread.
The net amount that I receive, the net credit, is $700 (2500-1800). How much can I lose? Well if AMZN goes to zero, I am obligated to buy your shares for $360/share, and I have the right to turn around and sell them for $340/share. I’ll lose $20/share or $2000. That’s the most that I could lose.
If I can potentially make $700 on a maximum risk of $2000, then the return on my risk is 35%. All I have to do is wait until the insurance policies (the pair of put options) expire in about eight months. That works out to about 5% per month. Not bad.
So that’s the Insurance Agent Trade: a Put credit spread placed well below the stock price with an expiration period of 60-90 days
As it turns out, I can usually exit this trade for almost all of the profit in perhaps six weeks. And as an added bonus, I will get all of my profit even if AMZN falls 5%.
Yes, you can make 5% per month with the Insurance Agent Trade, even if the stock that you are investing in falls.
If you want to learn more about this kind of trading, I’ve written a free report for you — How I Target 3-5% Per Month Even When My Stock Goes Down. You can download the report right now.
* The above is for educational purposes only; it is not a recommendation to buy or sell anything.