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Trader's Guide to Credit SpreadsThe strategies and ideas presented in this guide have been designed to provide you with a comprehensive program of learning. The goal is to guide you through the learning experience so you may be an independent, educated, confident and successful trader. There are numerous variations of traditional options strategies and each has a desired outcome. Some are very risky strategies and others require a considerable amount of time to find, execute and manage positions. Spreads are a limited risk strategy. Spreads Spreads are simply an option trade that combines two options into one position. The two legs of one spread position could have different expiration dates and/or different strikes. Spreads can be established as bearish or bullish positions. How the spread is constructed will define whether it is bullish (rising bias) or bearish (declining bias). Different types of spreads can be used for the same directional bias of the stock. For example, if the stock has a declining bias, a call credit spread or a put debit spread could be opened to take advantage of the same anticipated move down. In this guide we will be talking about Credit Spreads , which are a limited risk strategy. Learning how to manage risk is as important as learning the details of a strategy. Credit Spreads A credit spread is created when an investor simultaneously sells-to-open (STO) one option and buys-to-open (BTO) another option. The premium received for the STO is always greater than the premium paid for the BTO thus creating a net credit to the account. Example : STO a call using the 120 strike for a credit of $5.20 BTO a call using the 130 strike for a debit of $3.80 Net credit for the spread is $1.40 = 5.20 credit - 3.80 debit The ideal construction of a credit spread is to sell-to-open (STO) an out-of-the-money (OTM) strike and buy-to-open (BTO) the strike that is 5 – 10 points further out-of-the-money (OTM) using the same expiration. When opening a call credit spread , further OTM means a higher strike. When opening a put credit spread , further OTM means a lower strike. Both legs are opened on the same underlying equity and use the same expiration month. Call credit spreads are opened when there is a declining bias and will be profitable if the stock moves down. This is because a call credit spread is opened for a credit and since the value of a call option decreases as the stock goes down, at some point the spread will be bought-to-close (BTC) for less than it was sold-to-open (STO). Here is an example: Stock trading at 500 and has a declining bias. STO 510 call BTO 520 call This spread creates a credit of $4.80 Stock declines to 490 causing the values of the calls to also decline. The position can now be closed for a profit. BTC 510 call STC 520 call The cost to buy back the spread is only $3.80. Since the stock declined in value, the call options are cheaper. The spread was STO for a credit of $4.80 and BTC for a debit of $3.80 resulting in a $1.00 profit. Put credit spreads are opened when there is a rising bias and will be profitable if the stock moves higher. This is because a put credit spread is opened for a credit and since the value of a put option decreases as the stock goes up, at some point the spread will be bought-to-close (BTC) for less than it was sold-to-open (STO). Here is an example: Stock trading at 520 and has a rising bias. STO 510 put BTO 500 put This spread creates a credit of $3.60 Stock rises to 530 causing the values of the puts to decline. The position can now be closed for a profit. BTC 510 put STC 500 put The cost to buy back the spread is only $1.80. Since the stock went up in value, the put options are cheaper. The spread was STO for a credit of $3.60 and BTC for a debit of $1.80 resulting in a $1.80 profit. Time decay is a positive factor in trading credit spreads. Since the position is opened for a credit, money comes into the traders account immediately. As time value decays, combined with a favorable movement of the stock, the value of the position will decrease allowing the trader to buy-to-close (BTC) the position for less than it was originally sold-to-open (STO). Risk and Reward on Credit Spreads Reward The maximum profit that can be earned from a credit spread is equal to the net credit received when the spread was opened. For a credit spread to realize the maximum profit, both legs of the spread would need to expire worthless which means the position would need to be held until expiration and be out-of-the-money at expiration. It is not advised to hold positions until expiration. Short term movements in the stock plus time value decay provide opportunities to close out positions for a profit of, generally, about 10%. If a position is profitable and the trader decides to hold the position hoping for a bigger profit or in an attempt to carry the position to expiration, there is a good chance that the profit can disappear, and the position could turn into a losing position. A good way to lose money is to wait for a bigger profit. Risk The maximum risk, or potential loss, from a credit spread is the difference between the two strikes minus the net credit. Example: STO 120 call for a credit of $5.20 BTO 130 call for a debit of $3.80 Net credit for the spread is $1.40 The difference between the strikes is 10 points. $10 is the max risk less $1.40 credit = risk of $8.60. The maximum profit is equal to the net credit, $1.40. Losses occur when the short strike (the STO leg) is in-the-money at expiration. This is because the trader has sold to someone else the right to buy the stock at the short leg strike. Since the trader does not actually own the stock, they will need to buy it and sell it at a loss. A maximum loss will occur when both strikes are in-the-money at expiration. The breakeven point on a bearish (call) credit spread is the lower strike price plus the net credit. Referring to the example above, if the stock settled at 121.40 at expiration, there would be no loss and no profit. Example of breakeven point on above credit spread: Stock trading at 121.40 Buyer exercises the right to buy stock from you at 120. Since you do not own the stock, you buy it at the market price of 121.40 and sell it at 120. This results in a $1.40 loss You get to keep the original credit of $1.40. This netted against the $1.40 loss results in breaking even on the position. The breakeven point on a bullish (put) credit spread is the higher strike price minus the net credit. Calculating the Return There are two ways to view the percentage return of profits from a credit spread. One is to divide the profit by the difference between the strikes. If the difference between strikes is 10 points and the trade resulted in a $1.00 profit, that would be a 10% return ($1.00 / 10). The second approach is to calculate the return based on the amount of capital that was at risk. After all, if the trade lost 100% of the risk, that is the amount the trader would no longer have. So, the profit percent is calculated by dividing the profit by the risk. In the example above, the net risk is $8.60. If the credit spread trade resulted in a $1.00 of profit, the percentage return would be 11.63% ($1.00 / $8.60). This approach shows the importance of managing risk. Lower risk drives higher returns relative to capital at risk. Opening a new Call Credit Spread The following steps should be referred to when opening a new call credit spread position: 1. Review the technical indicators on your chart and confirm there is a consensus between multiple indicators pointing to a declining bias. 2. Select an expiration that is two to four weeks out. Two weeks is generally the minimum time to expiration you want to use. Building time into options positions is advised in case it needs to be managed. The sweet spot for opening new positions is three weeks to expiration. 3. STO an out-of-the-money (OTM) call strike. 4. BTO the strike that is 5-10 points further out-of-the-money (OTM). With a call spread, further OTM means a higher strike. Generally, when properly constructed, the credit on a 5 point spread will be in the range of $1.20 - $1.80. A 10 point spread will generally be 2.50 – 3.50. The closer the strikes are to the current price, the higher the credit, while this reduces the overall risk of the position, it also increases the chances of the position moving in-the-money (ITM) which can result in an overall loss. 5. When placing the order, always use a Limit Order . A limit credit order specifies to the market the amount of the credit you will accept. A limit credit order will be filled at the specified limit or higher. Market orders should not be used. 6. With some stocks and indexes, the difference between the bid and ask is quite large. The broker will usually give you a quote called the “Mark”. This is the midpoint between the bid and ask. It is the price you should start with when submitting your limit credit order. 7. Calculate the risk of the position. Difference between the strikes – credit = risk. A position with a credit of $4.50 and 10 points between the short (sold) and long (buy) strikes would have a risk of $5.50. 8. Use the risk number to determine the number of contracts to open. Risk x 100 = the investment required for each contract. With $5.50 of risk and 1 contract, the total investment would be $550. ($5.50 x (1 contract x 100 shares per contract)). The total investment on 4 contracts would be $2,200. ($5.50 x(4 contracts x 100 shares per contract)). 9. Once you know the total investment required per contract, you can decide how many contracts to trade based on the size of your portfolio and personal risk tolerance. 10. After the trade has been opened, place a Good-til-Canceled (GTC) order to close the position. A GTC order will stay active until market conditions are such that the position can be closed for a profit. GTC orders execute automatically and do not require you to be in front of your trading platform to take advantage of the profit opportunity. Place the GTC for a limit debit price based on your desired profit target. One example is to set a GTC for 50% of the credit you received when you opened the position. With a credit of $4.50, a GTC would be placed to buy to close the position at $2.25 allowing a $2.25 profit.
SP:SPXEducation
by NewCycleTrading
3
Moving Averages - Effective Settings for Day TradersHello Traders, In today's lecture I'm explaining how to use Moving Averages effectively on smaller (1hour) time-frames. Moving Averages can be applied to all assets including Forex, Stocks, Crytpos, etc.. Please note that Moving Averages are a lagging indicator which means they print on screen after price action has moved. They by no means are a leading indicator. Your most leading indicator will either be price-action itself or correlating assets. If anyone has any questions about Moving Averages, feel free to leave your comments in the comment section below. Trade Safe - Trade Well ~Michael Harding
Education
by Michael_Harding
EURUSD SELL LOOKOUT Happy Weekend Traders , EURUSD is already showing willingness to continue to drive down based on the 3 weeks Pin Bars formed on the weekly timeframe. However, i am patiently waiting for price to pullback to my interested point before i would be interested in swinging this pair for a huge amount of pips in the coming week(s) . Your likes and comments would be welcomed . Please kindly Smash the FOLLOW botton to get more of this analysis . Thanks to you all for the support .
Short
by hardinnofx
GBPCHF At Key Area. Two Scenario'sGBPCHF overall is downtrending as you can see on the higher time frames (4H and above). We have added a chart image of the weekly and daily charts below this description. As you can see on the weekly chart, Price in march had spiked down aggressively to form a new all time low for GBPCHF. This can signify a possible aggressive rise in price in the near future. Price had recently broken below a larger range and is now trading within a tight range below. On the 1H we have a clear downtrend towards the bottom of the range and price has failed to break below multiple times. We have marked two scenario's on the chart, however we have a LONG bias on this pair due to price nearing all time lows. Short scenario; If we get a clear break below support, we would like to see price develop a continuation pattern on the 1H or 4H charts to look for shorts. Long scenario; We would like to see price break above the minor resistance (blue line), retest and reject this area with strong bullish momentum candles (engulfing/pinbar) to confirm long positions to the top of tight range and possibly further. Follow us for more analysis and educational content!
Long
by BlueFireForex
GBPUSD Trendline & S/R Break And RetestWe forecasted this scenario on GBPUSD last week and it is playing out exactly as planned. GBPUSD on the higher time frames (4H and above) is downtrending and is currently trading within a range. We have added a daily chart image and a zoomed out image of the 4H below this description. Price had recently broken out of the strong 1.26500 resistance level but rejected higher prices and broke back into the range. Price was in an uptrend towards the 1.26500 resistance level, but has now broken clean below, and is possibly forming a downtrend. Price is now retesting the uptrend line, which is in line with a S/R zone(blue box) and also the downtrend line, which would add more confluence to a short trade if we see a strong rejection of this area. We would like to see a strong rejection of the uptrend line and S/R zone with a bearish engulfing or pinbar on the 1H or 4H charts to confirm a bearish bias. Our 3+ reasons to enter a short position; -Break of uptrend line -Retest and rejection of uptrend line -Retest and rejection of S/R zone -Rejection of downtrend line -Strong bearish rejection candles on 1H/4H Follow us for more analysis and educational content
Short
by BlueFireForex
Trader's Guide to OptionsThe information in this guide is intended to get you started with your understanding of #options, the terminology, and their basic characteristics. In addition to this guide, it is recommended that you study all information available under the education section of your broker’s website. Most brokers who cater to options traders provide good information that will help you learn. What is an option? An option is a financial contract between a buyer and a seller. It is an agreement to buy or sell the underlying equity (stock or index) at a set price by a pre-determined date. Instead of buying the stock a trader could buy an option for a fraction of the price of the stock. Options have the following characteristics: Traded as contracts and each contract represents 100 shares of the underlying stock or index. Pre-set expiration dates. Standard monthly options expire the third Friday of each month. Some index options like TVC:RUT , TVC:SPX , and TVC:NDX cease trading on Thursday before the third Friday. Weekly options expire each Friday. Price points, referred to as the strike price, are the prices at which buyers and sellers trade option contracts. Options are, usually, available to trade in standard price increments of $5 and $10. Quotes to buy or sell an option are presented as the bid and ask. When selling an option, the bid price is used. When buying an option, the ask price is used. Sell the bid / Buy the ask. Delta is the change in the value of an option relative to each $1.00 change in the value of the underlying stock. If an option has a Delta value of .45, it will change in value by 45 cents for each $1.00 change in the value of the stock. - NASDAQ:GOOG is trading at 1445. -The 1445 call strike has a Delta of .50 -GOOG goes down $10 -The 1445 call will decline in value by $5.00 = ( $10 * .50) The Options Chain: All option information for any stock or index is listed on an options chain. The options chain can be found on the website of the broker you use to trade. The chain will list all available strikes and expirations, the Delta, and the bid and ask prices. It will also display both Call and Put options. Ways to trade Options: There are four actions that could possibly be taken when trading options: 1. Buy To Open (BTO) - buying an option as part of opening a new position. 2. Sell To Open (STO) - selling an option as part of opening a new position. 3. Buy To Close (BTC) - buying back an option that was originally sold to open 4. Sell To Close (STC) - selling an option that was originally bought to open When a position is Bought-To-Open, it is referred to as a long position . When a position is Sold-To-Open, it is referred to as a short position . When a position is Bought-To-Open, it is done for a debit . When a position is Sold-To-Open, it is done for a credit . Are you new to options trading? Stay tuned for Part 2 of Trader's Guide to Options which will include teaching about call and put options. <- Direct link to chart image.
NASDAQ:GOOGEducation
by NewCycleTrading
EURGBP Break And Retest Forecast Playing OutEURGBP has broken above the strong .9000 whole number resistance level and is coming back to retest this level. Price overall on the daily chart is trading within a large range. We have added a daily chart image at the bottom of this description. Inside this larger range, price is respecting levels of support and resistance and therefore has been trading within smaller ranges. Price had tested the .9000 resistance level many times recently, and last week had successfully broken above due to negative GBP data. On the 4H and below, price has lost bullish momentum and is looking like it will fall back to the resistance turned support for either a retest and continuation or a break back inside the range. An uptrend could also be forming and the retest zone is in line with the uptrend line, a rejection of both the uptrend line and the S/R zone would add more confluence to a bullish trade. We want to see price fall back the the .9000 S/R level and rejected this area with a strong bullish engulfing or pin bar on the 1H or 4H charts to confirm continued upside momentum. Our 3+ reasons to take this trade -Break and retest of strong whole number S/R level -Strong bullish rejection candles (engulfing/pinbar) at S/R level -Rejection of uptrend line Follow us for more analysis and educational content
Long
by BlueFireForex
GBPUSD Possible Lower High/Downtrend RejectionGBPUSD overall is in a downtrend on the higher time frames (4H and above). We have added a Daily chart image with notes below this text. Price is currently trading within a range (red lines) and has recently failed to successfully break out of the top of the range. Price is in a small uptrend and close to touching the up trend line for a possible rejection and bullish continuation, or a break below. We have marked two high probability scenario's with arrows on the chart. Bullish scenario; -Price tests uptrend and/or support level -The up trend is in line with a support level (blue line) which would add confluence to a buy if we get a strong sign of rejection on the 1H or 4H charts, ideally a large bullish engulfing or pin bar followed by strong bullish momentum -Targeting the HTF downtrend line/next resistance (red line above downtrend line) and possibly further Bearish scenario; -Price breaks below the uptrend line and support level -Price retests the support level and/or uptrend line and rejects this area with strong bearish momentum candles -Targeting the bottom of the range We have a bullish bias on this pair, due to the break of the top of the range, we expect price to attempt to form a new lower high towards the HTF downtrend line but we always make sure to forecast many possible scenario's. Follow us for more analysis and educational content!
Long
by BlueFireForex
NZDUSD Double Top Rejecting HTF Downtrend LineNZDUSD on the higher timeframes is in a clear downtrend Price has recently rejected the HTF downtrend line with a double top (reversal pattern), visible on the 4h and below. Price then broke below the neckline but has respected an up trend line and is now retesting the neckline of the double top, which usually happens before a double top becomes successful. Currently price has strongly rejected the neckline, with a pin bar like candle on the 4H closing on the neckline, and now a large bearish candle on the 4H showing strong bearish momentum. Our 3+ reasons to take this trade -HTF downtrend line rejection -4H Double top -Neckline break and retest -Multiple 4H reversal candle confirmation on the retest -Break of uptrend line Follow us for more analysis and educational content
Short
by BlueFireForex
EURGBP Break And Retest | Two Scenario's EURGBP is trading within a large range on the higher timeframes and is currently trading within smaller ranges on the lower timeframes. This is EURGBP on the daily Earlier this year price strongly rejected higher prices at the top of the higher time frame range, so we can expect price may fall to the bottom of the range in future. Price on the 1H chart has been testing the strong .9000 resistance level. Currently price has strongly rejected this .9000 resistance with a bearish pinbar and strong bearish momentum afterwards. We have marked two scenario's on the chart, and currently it looks like the bearish scenario is playing out. Follow us for more free analysis.
Short
by BlueFireForex
NZDCAD 1H Bearish Pinbar At ResistanceNZDCAD on the 1H has formed a bearish pinbar signal near the very strong 0.8800 resistance level. Price on the lower time frames has formed a symmetrical triangle, and has strongly rejected the top of it with the pinbar. On the daily chart we can see price overall is downtrending and is heading up likely to attempt to test the higher time frame downtrend line to form a lower high after making a lower low earlier this year. However as price is testing the strong 0.8800 level resistance and currently is failing to break above, we can assume that price may have reached its peak around this level and look for shorts from here. We are aware price can continue further up from here and we can lose this trade (like with any other trade), but it would be better to take a high probability trade in this area and lose than to miss out on the opportunity due to fear of losing and for it to reach or surpass targets. We will be targeting at least the .8600 level for this pair.
Short
by BlueFireForex
EURJPY Daily Downtrend Break OutEURJPY broke out of a higher timeframe downtrend last week. Price also broke out of two strong resistance areas with the EUR strength we have seen for the past few weeks. We can see two possible scenarios; 1.Price falls to retest the strong support/resistance (red line) and continues with strong bullish momentum 2.Price breaks back into the downtrend creating a "fake out" and bearish momentum forms with EUR pairs Our bias for EURJPY is currently bullish as a result of the current strength in EUR pairs. To change this bias we would need to see price break back into the downtrend.
Long
by BlueFireForex
GBPUSD Possible Triple TopGBPUSD is in a range. Price is currently in a strong uptrend, heading towards the top of the range. Looking back on the charts, price has strongly rejected the resistance at the top of the range multiple times before, meaning this is a strong level. We would like to see price reach the resistance and reject with strong bearish momentum in the form of either 4H or 1H bearish engulfing candles, or pinbars. We are also aware of the up trending strength in this pair currently, and realise price can continue pass this level.
Short
by BlueFireForex
1
EURUSD Possible Break And Retest EURUSD has just impulsively broken above a strong level of resistance, marked with the red line. We forecasted this possible trade idea last week. Price is moving in a strong up trend on the 1H and 4H charts. We are now looking for price to retest the resistance now turned support, and/or one of the up-trend lines marked on the chart. We would like to see price ideally retest the S/R zone in line with an uptrend line, adding more confluence to a long position. This would be confirmed with a strong bullish engulfing/pinbar candle formation on the 4H or 1H time frames We are also aware this can be a fake out, and price can reject higher prices and fall back below the S/R area and back into the range, targeting the lows. Thats why we always wait for confirmation and confluence when trading.
Long
by BlueFireForex
1
NZDCAD Head & Shoulders Forecast Playing OutWe forecasted this NZDCAD head and shoulders last week. Our position is now running at over 4.15% with over 2.5% locked in with our stop loss. Now risk free with guaranteed profit. With experience analysing and trading in the live markets we were able to forecast the right shoulder far before it was confirmed, due to the nature that price was rejected the previous highs of the left shoulder. This was a very high probability trade due to all the confluence factors in line with eachother; 1.Multiple rejections of strong resistance level (red line above price) 2. Rising wedge break and retest 3. Head and Shoulders pattern 4.Right shoulder failing over and over to break the highs of the left shoulder 5. Bearish engulfing on the 1H time frame 6.Strong bearish momentum on the 4H time frame. This was our entry point, with a stop loss above the right shoulder highs, and a target at the bottom of the range, but trailing our stop loss according to our BlueFire Strategy as price develops safe levels. We were able to enter at the break of a minor 1H resistance at the top of the right shoulder, which is a part of our strategy.
Short
by BlueFireForex
WHAT TOPICS WOULD YOU LIKE ME TO COVER?Hi Guys - all my followers and non followers.. I am getting back to releasing weekly episode/episodes of the ' Art of trading Psychology' in the aim of helping traders get in the 'zone' when trading. Mastering trading psychology is by far one of the hardest aspects in trading yet it is also the one that will drive you to you success as a trader if mastered. I would truly love to cater this podcast to you guys and in order to do so, i need to understand what it is you're struggling with and what you would like to cover i.e - finding taking profit hard? - being consistent - scared to take a trade or uneasy when you're in a trade? - Losing too much? Anything you think of, drop it in the comments below or message me!!
Education
by Malika_Analysis