Get empowered - The purpose of this website is to help empower people with information that can help them gain control of generating their own income using stock options income strategies. The information provided here is not for beginners to options trading, but rather for those who have at least some experience trading options on stocks, or ETFs. You must know how an option works, and what obligations or rights you have when buying or selling an option. To assist you in learning what is required to understanding the income strategies being explained here, you will find references such as links to other websites, PDF files and a recommended reading list posted throughout this website.
Why not just trade stocks?
In order to make a profit trading stocks you would have to risk
capital on a trade where you have successfully predicted the direction of a company's stock price. Over a period of time after a trade has been placed at a chosen stock price, the price would have moved in one of three directions, up, down, or in a sideways range. You can make a profit if you bought stock and then it's price went up, or shorted stock and then it's price went down, otherwise you lose money. When trading stock, excluding any dividends being paid, even if the price stays the same, you lose money because of the commissions charged to you by your broker. So, when making your next trade, do you bet that the stock price is going up or going down? What if there was a way to trade for a profit without having to correctly predict the direction of a stock's price. What if you can make a profit whether a stock's price moves an unlimited amount in one direction from the trade entry price, moves within a limited amount in the opposite direction, or stays the same. You can!
The options credit spread:
An options credit spread is the simultaneous action of selling and buying options at different strike prices for a net credit. A net credit is achieved when the premium received for the sold (short) options exceeds the premium paid for the bought (long) options. The amount of margin or funds at risk is equal to the difference in the strike prices (the spread) minus the net credit received. The break even is equal to the sold (short) strike price minus the net credit. The credit spread trade's potential maximum profit, loss, and it's underlying stock's break-even price are known at the onset of the trade.
For example, let's use a bull/put credit spread.
When ABC Corp. stock price is at $42, the following options credit spread trade is placed:
Sell to open a July 35 Put for ABC Corp. @ $1.35 per share
Buy to open a July 30 Put for ABC Corp. @ $0.35 per share
The net credit for the trade: ($1.35 - $0.35) = $1.00 max-profit
The spread: ($35 - $30) = $5
The margin (funds at risk): ($5.00 - $1) = $4 max-loss
The break even: ($35 - $1) = $34
If the trade was opened with one contract per leg, and since each options contract controls 100 shares of the underlying stock, the net credit value would be $100 with a total margin of $400 at risk.
Example:
($1.00 x 100 shares) = $100 net credit
($4.00 x 100 shares) = $400 margin
Flexibility of stock price direction:
Now, let's examine the example trade above to see how flexible stock price direction can be at expiration while still keeping the trade profitable. Since we know the break even price is $34, if the stock's price direction was up at the time of expiration, we would make the maximum profit of $1. If the stock's price direction was in a sideways range staying right around the original price, we would still make the maximum profit of $1. The stock's price direction can even go down 16.5% to the short option strike price of $35 and still make us the maximum profit of $1. In fact, the stock's price can go down below $35 all the way to the $34 break even, and still have some profit.
Wow! That's what I call stock price direction flexibility. It's only when the stock's price direction is below the break even of $34 that the trade will start losing money, and only have a maximum loss at the long option strike price of $30 and below. The maximum loss is equal to the margin (funds at risk) at the trade onset.