Being a directional trader is damn hard work.
As a stock trader, you can go long or short. That’s it. Doesn’t that seem like an incredibly limiting way to trade? Surely there’s a better way?
Well, there is.
Today I’m going to share with you a strategy that I use to make consistent monthly income with less risk than traditional stock trading.
Credit spreads for monthly income
Credit spreads are a popular options trading strategy for traders looking to create monthly income. The thing you will LOVE about credit spreads is that you don’t have to be correct on the direction of the stock. You can make money even if you are wrong, and you can structure them to have a built-in money management system in terms of risk and reward.
Let’s look at the two different types of credit spreads:
Bull Put Spreads
Bull Put Spreads, as the name suggests is a bullish strategy constructed using puts. You set up the trade by selling a put option and buying a further out-of-the-money put. The trade has a defined maximum gain and a defined maximum loss.
Assume you are bullish on AAPL and have just had an entry signal according to your trading rules. AAPL is currently trading at $171.41. Let’s look at how you could construct your Bull Put Spread.
Date: March 21, 2018
Current Price: $171.41
Trade Set Up: AAPL Bull Put Spread
Sell 1 AAPL April 20th, 165 put @ $2.02
Buy 1 AAPL April 20th, 160 put @ $1.12
Premium: $90 Net Credit. You are receiving money into your account after placing the trade.
Max Loss: $410
Max Gain: $90
Break Even: $164.10
Percentage Decline to Breakeven Point: -4.26%
You can see that if AAPL stays above $165, you will make $90 in profit. AAPL can also decline by 4.26% before losses start to occur. This is the beauty of credit spreads. You are bullish on AAPL, but can still make money if the stock falls less than 4.26%.