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Trade Checklist: Vertical Put Credit Spread | Options Trading Concepts

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A vertical put credit spread is a bullish, premium selling strategy that takes advantage of time decay. It is constructed by selling an ATM/OTM put, and buying a further OTM put in the same expiration to define our risk. Tune in to learn more! New to options trading? Mike breaks down trading strategies and concepts in a visual way for beginner to intermediate investors. Follow: @tastytradermike ======== tastytrade.com ======== tastytrade is a real financial network, producing 8 hours of live programming every weekday, Monday - Friday. Follow along as our experts navigate the markets, provide actionable trading insights, and teach you how to trade. With over 50 original segments, and over 20 personalities, we’ll help you take your trading to the next level, whether you are new to trading or a seasoned veteran. http://ow.ly/EbzUU Subscribe to our YouTube channel: https://www.youtube.com/user/tastytrade1?sub_confirmation=1 Follow tastytrade: Twitter: https://twitter.com/tastytrade Facebook: https://www.facebook.com/tastytrade LinkedIn: http://www.linkedin.com/company/tastytrade Instagram: http://instagram.com/tastytrade
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Text Comments (13)
NBT 23 (4 months ago)
thanks for the video. maybe it would be easier to use a real-life example, gets a bit hard to follow.
David Schmiedeberg (5 months ago)
Mike, isn't there a risk of assignment if the underlying ends up in between your two strikes at expiration?
tastytrade (5 months ago)
There is risk of assignment on any short option that is ITM, but it is pretty rare. I view assignment risk through extrinsic value remaining in the option. When you exercise an option, you turn it into stock, which has no extrinsic value. Therefore if I have an option that has $1.50 in extrinsic value and I exercise it, I literally burn that $150. Even if a short option is assigned, as long as I have the protective long option my risk doesn't change, just the buying power does, since I'm now long or short shares of stock depending on whether the short option was a put or a call. The riskiest situation with spreads is if the stock price is between the strikes AT expiration and the trade is held through expiration. If the short option is ITM and the long option is not, the long option will expire worthless and the short option will turn into shares of stock. If this isn't desired, the trade should be monitored going into expiration day and either rolled or closed.
Jose Garcia (6 months ago)
this is genius ,,,,you know the risk off top and you collect the premium or take some profit along the way...I love it.selling puts is a real good thing,,,thank you
Anttjuan Reid (10 months ago)
Is it just me or is the max loss much much higher than the credit received? And I'm talking 25 Delta Puts. This is why it doesn't seem too worth it to me. One loss can wipe out 5 or more winners. The only worth it part is the small reduction in buying power. Or am I missing something here? Is there a way to keep max loss not so out of proportion with the max profit potential while still trying to sell one at 30% chance of in the money? Because the only way I've found to not have them super disproportionate is to sell close to the underlying price. Hope to get an answer back. Thanks!
tastytrade (10 months ago)
When selling OTM options, the max profit is usually lower than the max risk, because you're moving strikes further from the stock price and giving yourself more room. You can certainly get closer to a 1:1 risk reward ratio with ATM spreads, but you reach losses much faster if the stock goes against you since your strikes are closer. That is the tradeoff!
Jordan Le (1 year ago)
Do you need a large margin account to do this type of trade?
tastytrade (10 months ago)
You do not - brokers take the max loss as buying power reduction on the spread, so that value is entirely up to you. A $1 wide spread is $100 less credit received. The minimum to open a tastyworks margin account is $2000 - https://tastyworks.com/accounts.html
Steven Rogge (1 year ago)
For me, it would help if you explained it using the Tastyworks software.
Pam Candas (1 year ago)
Checklist? You mentioned a link to another video on rolling? Maybe I'm asking too much, but I'd expect an option trade strategy checklist to include: candidate (underlying) selection criteria (price, time, event risk, liquidity) trade type selection criteria (volatility, expiration cycle) strike selection (width, premium received) rules of the trade (price discovery, profit target, size) management (taking profits, rolling, exiting, assignment risk, dividend risk) portfolio management (correlated risk, position size, rate of return, theta) Where would I find this sort of checklist at tastytrade, please?
tastytrade (1 year ago)
Hi Pam, You can learn more about order entry at our link below. https://www.tastytrade.com/tt/learn/order-entry-checklist
Pam Candas (1 year ago)
Huh? You took two weeks to reply, and ... 1. not include a checklist ... 2. not include a link to the video on rolling c'mon ...
tastytrade (1 year ago)
Pam, We certainly go over underlyings in that fashion live on air, but this series had more of an "evergreen" content approach which is why we left the time sensitive specifics out. I would check out Good Trade Bad Trade on tastytrade, which features Tom & Tony picking a stock & finding a trade every morning @ 9:20 CST: https://www.tastytrade.com/tt/shows/good-trade-bad-trade

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