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From Greg M

Lions.. Below is the section of my book, A (NOT) SO RANDOM WALK ON WALL STREET, which covers how to set up credit spreads> I am going to urge you to read this and learn how to set these up.

Lions.. I am also going to ask you to support my work as I do on the first of every month. May I suggest just $5? If so, please click here: https://www.paypal.com/paypalme/GregoryMannarino

*Credit Spreads: Get Paid Upfront to Trade Stocks. Here I am going to show you exactly how to get a net credit to your trading account every time you enter a trade using a simple straightforward strategy. This IS the secret that Wall Street does not want you to know about! There exists a remarkably simple strategy which any trader can execute that pays you immediately upfront for simply placing a trade, yes this is true I am going to teach you how every single time you execute a trade, in the manner which I am going to outline here, you will get a net-credit to your account, (yes you read that right)! Moreover, as an options trader using this strategy you will use the arch enemy of traders, time decay, as a way of putting cash in your pockets. Let us first look at basic trade using simple calls, (hoping to take advantage of an upward price movement of the underlying stock). Say you are bullish on company XYZ and therefore go out into the market and buy calls. Well, if you are bullish on a particular stock buying calls is a remarkably simple way you can make money in the market no doubt however, immediately once this trade is executed you will get a debit on your account, which is the cost of buying the option, and then immediately after you execute the trade, time decay begins to work against you. Simply, a debit from your account means that you paid for the call option you just bought. Now for this trade to work, you need several things to fall into place. Number one, being that you bought a call you need the stock price to move higher, it cannot move sideways or down. If the call option(s) you bought on stock XYZ do trade sideways and makes no change whatsoever in price action you will lose money every single day that you have the trade open because of time decay also called theta. Again, with buying a call option you need the stock to move higher and quickly because time decay is working against you. Let us look at another example using puts, (speculating that the price of the underlying stock will drop). Say you are bearish on stock XYZ and you decide to go onto the market and buy a put, that is betting that stock XYZ will fall in value. How would this play out? To execute this trade, you must go into the market and lay out money/debit your account, to purchase/buy this put. What now must happen for this to be profitable? You need stock XYZ to move lower and quickly. If the price action of the underlying asset trades sideways, you lose money every single day because of time decay. Moreover, if the underlying stock price moves higher, you lose even more. 39 Now I want you to think about something for a moment. How does a department store make money? Simple, they sell you a product. Well, the same thing works with stocks and options. For any transaction to take place in the market, there needs to be both a buyer and a seller. Well, what would happen hypothetically if instead of buying a put or a call you were simply to sell one? How would that work? And how is this done? What is the risk? And can that risk be minimized? Let us begin here with a couple of examples and answer the above listed questions. Let us say you are bullish on stock XYZ, that is you believe the stock will rise in value. Well, why couldn’t you sell a put in this situation? Here is a simple answer: you absolutely can! (However, selling calls or puts onto the market is risky, but this risk can be mitigated, and I will cover this shortly). Now how can this play out? OK, so you are bullish on stock XYZ are you want to sell a put. In this situation again, you believe that stock XYZ is going to go higher so you want to sell a put(s) onto the market. What this would do is work TWO ways in your favor, (even THREE ways depending on other factors which I will cover soon). 1. If stock XYZ happens to move higher as you expected, the put(s) you sold make money or, 2. If the stock stays flat you make money, because if you sell an option time decay is not your enemy but an ally. 3. (we will get there, keep reading!) Plus, once you sell this put on to the market you get an instant credit to your account! Yes, you do. Now let us assume that the stock begins to move higher or simply stays flat. - Every single day you collect money from time decay. Yes, you heard that right! In this situation, time decay works in your favor. So, if stock XYZ moves higher, or stays flat, the put you sold will make you cash. Let us recap. If you buy a call you will only make cash if stock XYZ moves higher and quickly, the converse is also true if you bought a put. If you sell a put as in the scenario I just went over, as stock XYZ moves higher or even stays flat you make money, (two ways), and you got a credit to your account immediately, the converse is also true if you sold a call. Now, would not you rather have two ways to make cash other than just one? And get paid upfront for doing it? Of course, you would! Now I know what you are thinking, “selling a call or a put into the market is risky because you can lose more than your actual initial investment,” and you would be right. But what if I told you there is a way that you can keep your losses to a minimum even if the trade goes against you? Here is how this scenario would work. Let us say you believe that stock XYZ is going to move higher, well you can attempt to capitalize on this in two ways. 1. You can buy a call, or 2. You could sell a put. However, there is another way! A way which covers you from a big loss if the trade goes wrong. This is called a “credit spread.” It is called a credit spread because you get paid right up front by placing this trade and, your downside risk is minimized. Let me show you two examples of how you would set this up, (a credit spread). 40 So, today you are bullish on Facebook, ticker FB. Hypothetically, let us assume today’s date is Friday, July 27, 2018 and the price of Facebook stock is $173.69. I am now going to set up A credit spread for you. The name of this strategy is “Bull Put Credit Spread.” In this situation you are going to buy FB, 7 (seven), August 10, 165 puts- this is trader lingo for (seven contracts which expire on August 10th with a strike price of $165.00). Now, at the same time you are going to sell 7 August 170 puts. In this situation You are a net seller of puts onto the market. The debit on the 7 puts you bought would be $1,120.00 and the credit to your account which you get immediately for selling 7 puts would be $2,065.00. Therefore, the moment you place this limited risk trade you collect $945.00 (this is credited to your account). Now if the price of Facebook in this situation remains above the strike price of $170.00 on the calls you sold at expiration, you get to keep the entire credit to your account! Yes, you read that correctly. A Bull Put Credit Spread as outlined above is used when you believe that the price of the underlying equity will rise. You sell a put(s) with a strike price which is higher than the ones you bought and receive an immediate net credit to your account in doing so. We purchase an option using “Buy to Open.” We exit an option position which we bought by using “Sell to Close.” We sell an option onto the market using “Sell to Open.” To close an option position in which we sold onto the market we “Buy to Close.” Now think about this! In the preceding scenario I outlined that the current price of FB stock was currently trading at $173.69. So even if FB trades lower, even though you sold puts, as long as it does not trade below the $170.00 strike on the puts you sold onto the market-you still get to keep the entire $945.00 premium. So, in this situation if FB were to trade sideways, move higher in price, or even move lower in price up to the strike price of the puts you sold-you still make the entire premium. Yes, this is real. This is the #3 which I alluded to earlier. Let us set up another trade. Suppose you are bearish on QQQ. Let us assume today is Again July 27, 2018 and QQQ is trading at $177.29. I am now going to set up another credit spread for you and this is how it would work. The name if this strategy is “Bear Call Credit Spread.” Hypothetically, you could have sold QQQ, 10 August 17 $180.50 calls onto the market for an instant credit of $1,500.00 to your account, while at the same time buying 10 August 17 $182.50 calls-which would have cost you $830.00. Now, because you were a net seller onto the market, subtract the cost of the calls you bought, $830 from the credit of $1,500.00 from the calls you sold, and you will have an immediate net credit of $670.00 to your account. Now as long as the price action of QQQ in this case does not move above the strike price of the calls you sold onto the market; you get to keep the entire premium upon expiration. Also, in the above situation QQQ could have moved sideways, lower, or even higher, if it does not move above the strike price of the calls you sold at expiration you keep all the premium. In each of the above scenarios, the calls and or puts you BOUGHT should be thought of as an insurance policy-you do not care at all if they expire worthless. All you are concerned about is keeping/collecting the premium for the calls and or puts you SOLD at expiration thereby keeping the credit to your account which you received by executing this strategy. The Bear Call Spread Strategy as I outlined above is 41 used when you believe that the price of the underlying equity will fall. You sell a call(s) with a strike price which is lower than the ones you bought and receive an immediate net credit to your account in doing so. You can set up these credit spreads in many ways. If you are setting up any Credit Spread, you can buy and sell any combination of calls and or puts with different strike prices and expirations which could give your trade more room to “move around.” You could enter positions which expire further out, or even the next day. The general rules are as follows: A Bull Put Credit Spread is used when you believe that the price of the underlying equity will rise. You sell a put(s) with a strike price which is higher than the ones you bought and receive an immediate net credit to your account in doing so. The Bear Call Credit Spread Strategy is used when you believe that the price of the underlying equity will fall. You sell a call(s) with a strike price which is lower than the ones you bought and receive an immediate net credit to your account in doing so. How you ultimately set up one of these strategies is simple, the bottom line is instead of “paying cash out” of your account to enter a position, you get cash immediately added to your account using credit spreads hence why they are called Credit Spreads. So, what is the risk? If at expiration these trades turn against us, we will lose the credit which was applied to our account on the calls and or puts we SOLD, (depending on the strategy) onto the market. However, we profit from the calls or puts we bought, (again depending on the strategy), this keeps our overall loss to a minimum. Now, the calls and or puts that we sold onto the market would have to be bought back, or “bought/buy to close” from the market at a higher price PRIOR to their expiration or you will be “assigned.” An options assignment is when the options seller must fulfil the obligation of an options contract by either selling or buying the underlying security at the exercise price. If you hold an options contract which you sold onto the market past expiration that expired in the money, you are contractually obligated to supply the stock at the strike price to the buyer. So, to not get assigned simply be sure to close any position which you sold onto the market prior to its expiration. Remember! With options well, you have “options.” That is, you can exit any position at any time but be sure to “Buy to Close” any in the money options contracts you sold prior to them expiring. Now here is another perk of being a net seller into the market. Let us say your trade goes exactly as you planned and the options you sold into the market are closing nowhere near the strike price you offered them at. Keep in mind that this is exactly what you wanted, and this also means that the options you bought are about to expire worthless-again which is exactly what you were counting on when you opened the credit spread. The options you bought were simply and “insurance policy” and just an added cost to doing business-all you are concerned with using credit spreads are the contracts you sold! You want that premium. Here is the added perk. 42 If the trade goes as you planned you simply allow the options you BOUGHT to expire worthless, so no cost to trade out or “sell to close.” Moreover, regarding the options you sold-the credit simply stays in your account. As with any kind of speculation in the market there is inherent risk however, trading using credit spreads is much less risky over the long run than buying a straight up call or put-having to deal with not just time decay working against you every day, but also only making a profit if the underlying stock moves in the expected direction. Placing your trades in this manner, using credit spreads, gives you cash immediately up front which in my book is huge. You also get the added perks of still winning the trade if the underlying stock moves sideways, or obviously in the direction you want, and even if it trades in the opposite direction as long as the strike price on the options you sold are not crossed. By using credit spreads to trade not only do you receive cash immediately into your account upon placing it, you have not one, not two, but THREE ways you can profit. If you stick to simply buying calls and or puts sure you can make money, but first you have to debit your account for the cost of the option and you have only ONE way to make a profit, and that is for the underlying stock to move in the expected direction and quickly as to not allow time decay work against you. I would suggest trying to implement these “credit spread strategies” using a paper trading account at first so you can get used to how they work in real time. Most major brokerages like TD Ameritrade, Fidelity, Interactive Brokers, etc. all offer a 100% free paper trading platform. Get comfortable trading credit spreads and I believe that you will be incredibly happy with your future trading results. Being able to capitalize on either the price action of the underlying asset trading flat, moving in the expected direction, or even against you, while getting paid a credit immediately upfront is tremendous. Happy Trading!