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Options for the Beginner and Beyond: Unlock the Opportunities and Minimize the Risks by W. Edward Olmstead - Professor of Applied Mathematics McCormick School of Engineering and Applied Sciences Northwestern University

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Chapter 11. Event-Producing Credit Spreads[*]

[*] Chapters with more advanced content are marked with an asterisk and can be passed over by beginners during the first reading of this book.

To further illustrate vertical spread trades, this chapter explores an idea for finding good credit spreads 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 ...

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