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video is a bit misleading.
first of all, max loss will always be greater than max profit on an OTM credit spread.
second, you do not gain the entire premium received by selling the put or call, you have to subtract the premium you paid to purchase the other put/call that is further out of the money.
Thirdly, there are many more circumstances that can cause a stock price to move drastically other than just a stock buyout or market crash. Quarterly earnings reports, recent news, the launch of a new product, etc. can all shift a stock price +/- 25%
so unless you're selling wildly OTM credit spreads, there are many more instances in which you can lose money than you suggest.
guys this strategy is very simple.. If you know how naked put strategy works. He is just putting a stop loss for his naked put. If price goes beyond his naked put strike price, he will cap the loss and get out. Simple
This is really a poor explanation. You fail to mention how far away from the at-the-money strike you sell the spread and what calculations of probability are involved with that. Further, there is no mention of the how far out you are executing the spread. Whether or not you use puts or calls depends on if you are bullish or bearish on the underlying security - another basic fact you fail to mention. Puts are used when you are bullish while calls are used when you are bearish when selling credit spreads. Bad video and poorly illustrated.
This video could use more details - what type of spread & what specific options were bought/sold relative to the profit/loss graph & price chart; how much of a credit; what to look for before entering; what to watch/adjust during; when to exit....
In the case where you sold a put with a strike below the stock price, what happens if the stock price drops to or below the
strike price? Is the Option exercised when the stock price hit the strike price?
If you sold a put and stock drops below your strike price (plus your credit from selling the put which equals your break-even price) then you'd be obligated at expiration to buy the shares at the strike price. The option is not automatically exercised until expiration.
Small error? The stock price is $18.30, I'm bearish. Instead of call spread above stock price as in video. I executed put spread, sell put $22.50 and buy put $21.50. If stock price stays below $21.50, I keep the premium, right? Thanks
I still don't understand how you are only losing less than you are profiting? Most of the time I've seen this exact strategy risk the loss of more money than it would have profited. This of course is from my experience watching videos and reading about the spreads. I have not traded options yet because I am weary about them. My biggest concern is what happens when you have to fill that option you wrote because it's been called? My point is it's almost time for expiration and now the option you wrote is being called, but you don't have time to call on the the option you bought...does that make since? Even if you use this strategy you can't just call on the other option that you just bought because it has already expired...right?
I'm still kinda lost when it comes to options, probably because I expect contracts to be fulfilled, not just expire all the time.
Look up theta and delta. Options expire worthless. Delta is how much the option is worth per dollar. Theta is how much the option losses it worth per day. You want to buy options with long expatriation and high delta.
Is it possible to buy monthly options a bit out of the money or at least far enough you could sell on price closer. If it is would it be possible to buy a monthly option and sell the weeklys one strike closer and let the one sold expire and sell the other and keep the profits, assuming that after you sold both options you would have a profit??
I know this is a super old comment, BUT...
Credit spreads and debit spreads can have the same P/L chart, just swap CALLs for PUTs. Meaning a bullish call debit spread has the same shape/direction as a bullish put credit spread.
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