Phil McDonnell is an experienced trader and a fantastic writer. He is a colleague of mine at OptionsProfits. I think you’ll enjoy and learn from this article! Phil has written extensively over the years on trading, volatility and correlation. One of my favorite writers, Phil has put together a quick article about a favorite topic of mine, selling credits spreads. Take a look, any questions let me know.
Many of my trade ideas are for writing an out of the money put that has a significant degree of price protection. However we can convert any out of the money put sale to a credit spread. Depending on your broker and account status the conversion may offer lower margins and greater safety.
Suppose we are considering selling the April 175 put for $2.10 as an outright put sale. Instead we could convert this into a credit spread by buying the April 170 put as a protective hedge. Our cost on buying the protective hedge would be about $1.40, so we net $0.70.
The difference would be that at most brokers we only have to put up the difference in strike prices as margin. Thus our margin would be $500 on the spread. This compares to 10% of the….
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