The Main Benefit of Learning to Trade Credit Spreads

There are many different types of options trading strategies available to investors, each one with a specific benefit. Before beginning to trade any strategy, investors should take the time to understand those benefits, and how they specifically apply to their personal trading program.

A professional options trader by the name of Lee Lowell discussed in his book, Get Rich with Options, why credit spreads offer such significant opportunities for investors. Lee spent 15 years as a market maker, and then on the floor with the New York Stock Exchange, so his experience is quite extensive.

He said, “one of the greatest benefits of an option credit spread is the cushion it gives you in case of an incorrect directional prediction.”

In other words, the trader does not have to be right in his or her prediction of the direction of the market in order to make still profit from the markets movement.

However, trading credit spreads massively reduces this risk. It allows the market (or the underlying stock) to fluctuate up, down, or even sideways, and the trader can still make money and take advantage of the leveraging power of an option credit spread.

Compared to, for example, buying a stock, or a basic call or put option. In such case, the trader is attempting to “predict” the direction of the market. So the market must go up or down in order for the trader to make money. This leaves absolutely no room for an incorrect market analysis, or for news to change the direction of the market. The trader has a 50-50 chance of making money with the speculation on a stocks direction. There is really no margin for error.

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