This page was created to give prospective members a better feel for the option trades we make. What strategy we choose depends on what the market is doing. If the market is flat and not moving much we do certain types of trades more, and if the market is flying in one direction either up or down, we concentrate more on other types of trades.

Volatility is an option trader’s friend and nemesis. High volatility is great because it raises the prices of all options. As sellers, this means options are pricier and the seller gets paid more when he sells them than under normal conditions. But high volatility can also hurt us because the market can move quickly.

Here are the option trading strategies we use and a short decription of them.

Credit Spread Option Trading Strategy

The credit spread is one of our favorite option strategies. This is a trade which results in a credit (money given to you at the beginning of the trade). It consists of two different options (legs).

You buy an out of the money option at a certain strike price and then you sell an out of the money option at a different strike price of the same month.

For example, if ABC stock is selling at $50. You sell the $75 January Call option for $2. Then you buy the $80 January Call option for $1.50. You get a credit of 50 cents. As long as ABC stays below $75 at expiration you get to keep the credit. As time goes on the options will decay in value. This strategy allows you to win if ABC goes down, stays where it is, or goes up until $75.50. You start to lose money above $75.50.

Since each option is for 100 shares, the maximum potential gain on the above trade would be $50. (50 cents x 100 shares). The maximum loss would be $450. (Difference in strikes minus the credit: 80-75-.5) The return on investment would be 11.11% I like to place credit spread close to expiration so this return for would for a one or two month time frame.

Buying the second option does two things:

1. If protects you from a large loss if ABC shoots above $75.

2. It allows you to do the trade with less margin.

So even though you have to pay for the second option, it is a conservative strategy to employ it.

You can also do credit spreads with Put options if you think a stock is going up.

Which option strike you decide to sell depends on how aggressive you want to be. Our style is conservative so we choose options that have a very low probability of expiring with any value. If you use this strategy with At the Money or In the Money options you can make a lot more money, but have a higher risk of loss.

Iron Condor Option Trading Strategy

Another of our favorite option strategies is the Iron Condor.

An Iron Condor is simply two credit spreads, calls and puts, used together. This way you get a larger credit. Most stocks stay within a range. And using statistics we can tell with a high degree of confidence exactly what that range will be. We then sell options above and below this range. As long as the stock stays in the range, we win.

If the stock threatens to break our range, we have to adjust our range by adjusting the trade to account for the movement.

If you subscribe to my Free Options Course, I will show you exactly how we put on an Iron Condor trade, a real trade that we did, and the adjustments that we made to the trade when it got into trouble.

For more details click here: Iron Condors

Butterfly Spread Option Trading Strategy

The butterfly is a neutral position that is a combination of a bull spread and a bear spread.

Let’s look at an example using calls.