High Probability Option Trading – Covered Calls and Credit Spreads


High Probability Option Trading - Covered Calls and Credit Spreads


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Author: High Probability Option Trading

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Covered Calls and Credit Spreads

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Run time: 58 minutes. Credit spreads provide a low-risk way to profit from selling options without taking on excessive risks.  However, traders may fail to maximize the potential of the strategy by not understanding all the components involved. Options expert and former floor trader Dan Passarelli explains the advantages of credit spreads; the dynamics of spread pricing; and his method for selecting low risk/high reward credit spreads.  Three factors drive the value of a credit spread: time decay, the direction of the underlying stock, and volatility.

While credit spreads naturally profit from time decay, they lose value if the market moves the wrong way or if volatility increases.  The challenge is to lessen risk factors by choosing the right stock, the right options expiration month, and the right strike prices.

Passarelli provides his insights into meeting these challenges based on his long experience as an options floor trader. He explains why it’s vitally important to choose a stock that has just bounced off a support/resistance point, has low implied volatility, has strike prices at or just beyond key support/resistance areas, and will expire in the next two weeks to two months.     Passarelli provides a number examples to show precisely how he uses this method in actual markets.