Learn How to Trade Options (Collection)

11*. Event-Producing Credit Spreads

To further illustrate vertical spread trades, this chapter explores the concept of acting on a volatile price move in the underlying stock to establish a good credit spread with options. We indicate when to enter the credit spread and how to structure it.

First let’s review the three major elements that typically characterize a good vertical credit spread:

1. A credit spread works best when extra premium has been pumped into the price of the option being sold.

2. A good credit spread is structured so that the underlying stock price needs little or no movement to achieve maximum profit.

3. Conditions are such that 1 and 2 can be realized using front-month options.

Now see when you might expect to find the circumstances ...