SPX Credit Spread Strategy — Step-by-Step Guide & Transcript

[00:03] credit spreads on S&P. In this video, I'm going to share with you my exact strategy, why I love trading spreads on S&P, when to enter and exit, and how to Hi, my name is Gotham, and on this channel, I talk about the stock market

[00:18] and achieving financial freedom with the power of options trading. So, if you enjoy content that can help you retire early and achieve financial freedom, don't forget to hit that like button, subscribe to my channel, and share this

[00:30] Also, if you are new to the options world or are simply looking for one-on-one guidance to help you shortcut years of trial and error and avoid costly mistakes, click on the coaching link below and I'll be honored to help

[00:43] you out. Now, let's dive in and get started. A quick disclaimer before we get started. This information is for educational purposes only and I am simply showing you how I trade and how I make my trades and this should not be

[00:55] considered financial advice. So first let's talk about why I absolutely love trading spreads on S&P. SPX is cash settled meaning that there's no assignment risk in case the options go in the money. S&P options settle in cash

[01:10] and not shares. You're simply credited or debited the P&L difference and no shares are exchanged. Secondly, SPX are European style options. And what does that mean? That means that there is no risk of early assignment. Unlike

[01:24] American options that can be assigned before expiration. Since S&P options have daily expiration, it gives you the opportunity to trade five times in a week, unlike some other stocks that have only weekly expirations. That makes SPX

[01:38] the perfect candidate for zeroDT trades. Next, let's talk about credit spreads. So, a credit spread is a option strategy that collects premium upfront by selling one option and buying another further out of the money on the same underlying

[01:52] stock and expiration. You profit when the spread expires worthless, meaning the price stays above or below certain levels. Next, let's talk about a put credit spread, also known as a bullput spread. So, how does this spread work?

[02:06] This is a vertical spread. And to construct this spread, you sell one put option with a higher strike price and buy another one with a lower strike price, both expiring the same date. The goal of the put credits is that you want

[02:19] the stock or the index to stay above the higher strike price, so both options expire worthless, and you keep the premium you collected earlier. The best time to use this strategy is when you're bullish or think the price will stay the

[02:32] same or go up. Let's do an example. Let's say SPX is currently trading at Let's say SPX is currently trading at 5,000. So you would sell a 49.65 put for 5,000. So you would sell a 49.65 put for $9 and simultaneously buy a 4960 put at

[02:46] $8. And for putting the spread together, you would get a credit of $1, which is the difference between the put that you sold and then the put that you bought. If S&P stays above the short put, which is $49.65 65 at expiration. Both options

[03:01] expire worthless and you get to pocket the $100 premium. Next, let's look at a call credit spread, also known as a bare call spread. A call credit spread is a vertical spread where for the short leg, you sell a call option at a lower price

[03:16] and simultaneously buy call option at a higher price with the same expiration. The goal of the spread is that you want the stock or index to stay below the lower strike price. So both options expire worthless and you keep the

[03:30] premium you collected. A good time to use this strategy is that when you're bearish or you think that the price of the stock will stay the same or go down. So taking S&P as example again, let's say S&P is currently trading at $5,000.

[03:44] You would sell a 5035 call option for $9 and you would buy a 5040 call option for $8. For putting the spread together, you would get a credit of $1, which equates

[03:56] to $100. as each options contract lets you control 100 shares. So at expiration, if S&P stays below 5035, both options expire worthless and you get to pocket the entire premium of $100. Next, let's talk about some entry

[04:09] rules and exit rules for this strategy. For the entry rules, you want to ideally do the spread on a day that's not too volatile. The ideal time would be when the VIX is trading around 20 or lower. For those who do not know, VIX is an

[04:23] volatility in the stock market. Second, you want to choose a day when there are no major planned news events like CPI or Fed announcements etc. You want to enter the trade 30 minutes to an hour after open when the market has clearly chosen

[04:38] a direction and you have marked the support and the resistance levels. and the resistance would be the top. For a put credit spread, you want to sell the short put below the support level with a delta of 15 or lower for a higher

[04:53] probability of profit. For a call credit spread, you want to sell the short call above the resistance level with a delta of 15 or lower for a higher probability of profit. You will receive more premium if you sell a higher delta, but it would

[05:08] more risky with a higher chance of going in the money. As far as exiting the trade, you want to exit at a profit of 50 to 75% or let the options expire that the market direction will not change. However, I highly recommend

[05:24] taking profit anywhere over 50%. Because the market can change direction in a second based on any news. Your stop loss would be 2x of the premium that you've received for putting the trade together. So, let's say for selling one put credit

[05:38] spread, you received $100. Your stop-loss would be a loss of $200. Last but not least, let's talk about risk management. One of my favorite reasons for selling spreads is that the risk is defined before you enter the trade. Here

[05:51] are some tips to manage your risk on the S&P credit spreads. So, first, you only want to use a spread width of $5 on the S&P spreads to keep your risk to a which is the price difference between the put and the call, the more the risk.

[06:06] your emotions are certainly different when trading in real time. But because credit spreads can be complex, I suggest paper trading as you can easily lose a lot of money if you don't understand how

[06:18] the spread works properly. Only trade the amount of contracts you can handle. the amount of contracts you can handle. One $5 spread on S&P has a max loss risk of $500. And again, your risk is defined

[06:30] before you enter the trade. If you sell a spread which has a $5 width, your max loss is going to be $500, which is $5* 100 shares. If you trade five contracts, your max loss would be $2,500. Or for 10 contracts, you would have a max loss of

[06:45] $5,000. To ensure that you can make consistent profits, selling spreads on consistent profits, selling spreads on S&P, always set a hard stop in case the markets change direction on any expected news or tweet. So, that's it for this

[06:57] video. If you enjoyed this video and learned anything useful, please give it and leave your comments below with any thoughts or feedback. If you'd like click on the first link in the description below and I'd love to help

[07:11] description below and I'd love to help you