chapter 5Credit Spreads

Some traders are intrigued by the odds of success that short option traders enjoy, but are not willing to accept theoretically unlimited risk on a trade that provides limited profit potential. An alternative to selling naked options, the term “naked” referring to the fact that there is unlimited risk, is the credit spread. A credit spread involves the sale of an option with the purchase of a distant option of the same kind. In other words, if a trader sells a call option, a call option with a higher strike price can be purchased to limit the trader’s risk.

Limited Risk Premium Collection

Essentially, when executing a credit spread a trader is giving up a portion of the collected premium for peace of mind. ...

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