Credit Spread Trading on the SPX

At the present time, I am waiting to close my first SPX credit spread position for the 2007 calendar year. That position was opened before I started this blog, so I thought we might cover some basic concepts while we wait to jump into February positions.

The concept behind my trading on the SPX is to adopt high probability positions. To maintain positions with a high probability of being profitable, I want identify the prevailing trend of the market and favor that trend. The goal is not to predict where the market is headed, but simply to pay attention to where it seems to be going.

If I am successful at recognizing the direction in which the market is headed I then have the opportunity to sell options outside of its anticipated path. I will sell both put and call options, if the market conditions favor such sales.

Sell puts or calls carries certain risks. Those risks can be substantial and must be recognized and dealt with if you have any real expectation of being profitable over the long term. For this reasons I never sell options on the SPX without also simultaneously buying other options.

The result of my simultaneous purchase and sale is the creation of a vertical credit spread. These credit spreads may consist of calls or puts. If you would like to know more about credit spreads, be sure to enroll in our free option trading mini-course.


Christopher Smith
TheOptionClub.com