Credit and Credit Spread Option Trades

Credit spread trades and option income strategies are option trades that result in a net credit when setting up.

Unlike debit spreads where the trader must pay something upfront to initiate the trade, the option credit trader receives an initial net cash payment (or 'credit') when initiating the trade.

Credit Spread Overview

For more information about spreads and spread trading, check out the All About Option Spreads page.

I admit that I have a soft spot for credit and credit spread strategies (aka option income strategies). Next to the Leveraged Investment approach, these are my favorite option trading strategies.

For every net purchaser of options trafficking in net debit spreads and hoping to make a killing, there's a net seller of options trafficking in net credit spreads and hoping to run a profitable and lucrative cash flow business.

Even though the debit/debit spread trader and the credit/credit spread trader frequently stand on opposite sides of the same trade, they do seem to share some common characteristics. They both typically:

  • Have short-term time horizons
  • Have little if any interest in actual stock ownership (if they do have any stock positions, long or short, it's most likely incidental to their option trading strategy)
  • Have made a personal calculation regarding a specific stock or the market in general - although each came up with a different answer

Generality:

For the net debit trader, a smaller ratio of successful trades but where the potential gains from those trades are huge is a winning strategy.

For the net credit or income trader, a higher percentage of smaller gains with the risk of only an occasional moderate loss is the formula for option trading success.



Net Credit Strategies and Option Credit Trades

The option income credit strategies in order of increasing complexity . . .

Covered Calls
Naked Puts
Covered Combo
Bull Put Spread
Bear Call Spread
Iron Condor


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Warren Buffett Zero Cost Basis Portfolio Current Equity Holdings:

KO - 125 shares
KMI - 100 shares
BP - 100 shares
MCD - 30 shares
JNJ - 25 shares
GIS - 25 shares
PAYX - 25 shares

Open Market Purchase Price: $20,071.83

Less Booked Option Income: $16,341.71

Tot. Discount: 81.42%
Adj. Div. Yield: 19.59%

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