Many options traders prefer to avoid making directional plays with options. The idea that time decay will eat away at the value of a position if it does not move quick enough turns a lot of traders away from directional strategies and outright call and put trading. Traders who want to avoid this type of trading often turn to options credit spreads and non-directional options strategies that create “income” from being short options premium. While this is a very popular method of trading most traders that run these types of strategies lack a systematic and methodical approach to setting them up. Here will discuss a simple method for setting up these types or trades in individual equities.
First a trader needs to decide what stock they want to set up a credit spread in. They can use any technical or fundamental analysis method they choose to select a stock but they should be looking for a stock that they think will not move much in either direction by options expiry. Once they have made this selection they need to calculate how much the market is expecting the stock to move then use these calculated levels to select strikes for options credit spreads. In the example below we will set up a credit spread in Apple Inc. (AAPL) with the expectation that the stock does not move much by options expiration. (Note: we do not necessarily think this will be the case we are just using AAPL for the purpose of the example.)
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