As a savvy trader, you're always on the lookout for that exceptional tool to solidify your edge.
A vertical credit spread is a bullish, defined-risk strategy made up of a long and short put at different strikes in the same expiration. The strike price of the short put is higher than the long put.
Generally, most investors and traders tend to buy simple Options into Earnings
Announcements. That is not a good trading strategy
Why?
Because sometimes your simple options can still lose money even if you are right with the direction of the stock movement.
So you want to stay on the other side and sell them deep-out-of-the-money Weekly Put options before Earnings Announcements and collect a juicy premium.
And, you also want to buy farther-out-of-the-money Put options at the same time. So your buying power does not get tied up.
More importantly, to protect the capital in the event of catastrophic drop in the stock following Earnings Announcements. It can play nice role as insurance
I have made a mistake of not buying insurance (farther-out-of-the-money Put options). To this day, I still regret it. But you can learn from my mistakes.
Having said that,...
It is REALLY hard to lose when you structure these trades correctly, because.....
1. If the stock goes up, you win!
2. If the stock stays flat, you win!
3. If the stock goes down a little, you win!
The only way you lose is if the stock goes down a lot. That's it!
As I said, this trade gives you not one… not two… but three ways to make money.
VERTICAL PUT CREDIT SPREAD EXAMPLE
Suppose you’re bullish on a particular stock. So, you decide to employ the bull put spread strategy.
Stock price at entry: $120.00
Put strikes and prices: sell the $110.00 put for $12.00; buy the $90.00 put for $4.00
Spread entry price: $12.00 received – $4.00 paid = $8.00 net premium (net credit received)
Breakeven price: $110.00 short put strike – $8.00 net credit received = $102.00
Maximum profit potential: $8.00 net premium received x $100.00 options contract multiplier = $800.00
Maximum loss potential: ($20.00 spread width – $8.00 net premium paid) x $100.00 options contract multiplier = $1200.00
Since there’s a maximum profit potential for this trade if the new stock price is at or above the short put strike, you’ll get:
$8.00 net premium received x $100.00 options contract multiplier = $800.00 profit