Hello OptionGenius.

I have been trading credit spreads for about 3 months now with some success.  I read the nine part  course and realize that my past training didn’t discuss much about selection of trades and adjustment of trades.  When I was looking around the website, I saw a brief reference on how you scan for and pick your trade opportunities, how you use the mathematical models with standard deviation to help your selection and how to determine exit points., but there weren’t too many details on these topics.   Do you share the information about scans, about the mathematical models and how to use them as the subscriptions move along?

Eric,

For credit spreads most traders use technical analysis to find support and resistance and use those levels to pick strikes. I have found that, that strategy works except when it doesn’t. support and resistance are guidelines not walls that the stock will not go through and so you will do fine for several months until one month, something happens that was not expected and you lose big on your credit spreads and that wipes out all the profit from the prior months. Credit spreads are pretty dangerous. They are hard to adjust because you are hoping the support stays in place.
 
For example, I have a credit spread on right now in my personal account. It is a POT Oct 85/80 Put credit spread. So I want Pot to stay above 85 at expiration which is 10 days away. yesterday, POT got to 85 and change. Today it is back to 88.80. So the resistance held,(lucky for me). But if I had tried to adjust the trade I would have gotten killed. Credit spreads, from my experience, are trades you put on, wait and take them off if they are going to be a large loss or a total win. There is not much in between.
 
For the other income strategies, you look for stocks.indexes/etfs that are channeling – moving in a sideways direction. any of the strategies can be used on such a stock. But the best thing to do is to focus on a few – maybe 10 that you get very familiar with and trade those month after month. Blue Chip Dow 30 stocks are usually good candidates – MCD, WMT, KO, PEP, XOM, PG, etc. Their volatility is lower and the prices are high enough to make the options have enough premium to work with.
 
But stay away from earnings. Don’t do income trades during earnings.

How Do You Scan For Trades? is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

With a debit spread, the max you can lose is the amount you paid for the trade. The max you can gain is harder to determine. I do it using the Analyze tab on my broker’s platform. On a butterfly you can make up to 200% of the debit and sometimes more. On a Calendar you can make 100% of the debit. But you normally will not. At expiration, the profit zone becomes very narrow and the Greeks (delta, gamma, theta, and vega) become very volatile and option prices make huge swings up and down.

On either of these trades, 20% profit is a good number to shoot for. So if the trade costs you $1,000, aim to make $200-$250. Once you hit your target profit, you can take some of the trade off to protect your profit and stay in the trade to see if you can make more.

But with a debit trade, you have to sell the trade to get your money. If you let the options expire, you lose everything you paid. So be sure to keep that in mind.

It’s the opposite with a credit trade. Here you get money to make the trade, and the money you get (the credit) is the max you can make.

So let’s look at a simple credit spread.

I sell 2 of the AAPL Oct 155 Puts and buy 2 of the AAPL Oct 150 Puts for a credit of .62

In this trade I want AAPL to stay above 155, if it does, I keep the entire credit.

 Since the trade consists of 2 spreads (2 Sold and 2 Bought) I multiply the credit times 2 to get my total credit. .62 x 2 = 1.24. In dollars this translates to $124 credit, which is the most I can make on this trade.

 Now let’s calculate my max loss.

 The strikes I traded were the 155 and the 150. The difference between them is 5 points, or in dollar terms, $500. That is the most I can lose on each spread. Since I did two spreads the most I can lose on this trade is $1,000.

 But wait. I also collected the credit, and that is mine to keep no matter what happens. So we take the credit and subtract it from the difference between the strikes.

 1000-124 = 876. This is the max I can lose on this trade. This is also the margin/account balance I am required to have in my trading account to be able to make this trade.  I am risking $876 to make $124.

 If I divide 124 by 876, I get a potential return on my money of 14%.

 This was a simple credit spread. In an iron condor you have to do this for the put side and the call side and then add the credits together.

Calculating Profit Potential and Max Loss on an Options Trade. is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com