Why Spreads, Why Now?

Option spreads allow you to make money as a stock does not move into a certain area.  For example if you made a bull put spread by buying the $40 put and selling the $45 put you would be profitable as long as the stock stayed above $45.

They give you a great way to profit in the stock market.  So why is now a great time to be trading spread strategies?

1.       Volatility.

 The VIX measures volatility which helps determine the price of options.  As volatility goes up options become more and more overpriced.   Well in 2007 the vix was trading between $10 and $30, and it has been doing that since 1990. 

Well now the VIX is at $45, translation a lot of overpriced options are out there.  By trading option spreads you can benefit from these overvalued options by selling them and walking away with the premium.

2.       Stocks are range bound.

Stocks are going back and forth, up huge then down huge.  But in reality not much is actually happening.  This means we can take advantage of this range bound market by selling options outside of those ranges.

3.       Directional Trading can be hard, especially now.

I don’t know about you, but trying to catch every swing in the market right now gives me a headache.  I would much rather just sell some credit spreads or even do an iron condor for this market.

4.       Selling options adds up. 

Most people will not sell options because that is nothing compared to how much you can make if you get a good move buying options.  Well selling options can add up.   It’s about consistency, not homeruns.

5.       Selling Option spreads can limit your risk.

Unlike selling naked options your risk is limited by spreads.  You can use them to profit if you are right and manage risk if you are wrong.  And those are the two things you need to make money.

For more on spreads visit http://www.stocks-simplified.com/Option_Spreads.html

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