Hi Shoppers,

Yesterday, Mark Sebastian invited me to be a guest on one of his many media appearances ..

We talked about the market’s spiciest topic … put credit spreads! (That basically means … selling put spreads for a credit.)

Seems kind of crazy with the market volatility we have been having, you know, those major swings up and down.

The general sentiment is that any day now we are going way down. The VIX consistently trading above 30 and above the VIX futures also supports this theory.

Well, there can be two different objectives in trading put credit spreads.

• • The first is to acquire the stock at a lower price than where it is currently trading.

    You would set this spread up by selling a put that is just out of the money and buying a further out strike against it.

    Buying that further out strike protects you if the stock really tanks and lowers your margin.

    If the stock trades down to or just below your strike, less what you collected, you are happy to be long the stock at that level.

  • The second is to just collect these small dollars without taking a position in the stock.

    You set these spreads up in stocks with very high implied volatility in the put options.

    Select a put option to sell that is far enough away from the stock price, but still has some meat on it.

    Against that put, you buy a further out of the money put for protection and margin.

    Generally with these types of put credit spreads you are collecting around $.50-$.80.

Doesn’t sound like much, but these can add up to nice profits.

I would say selling put credit spreads is an option trading style all its own.

Here are two tradable examples …

Putting It Up

The first example, in which you would like to own the stock at a lower price, is in Meta (Ticker:  FB).

FB is trading $203. You can sell the Mar. 18 190/175 put spread for around $1.25.

You like this spread because you wouldn’t mind owning FB at $188.75. (The 190 strike price less what you collected for the spread at $1.25).

The second example is in Exxon (Ticker:  XOM). You are thinking the stock is going higher and you would like to profit from that.

The implied volatility is too high to buy calls so you look for an out-of-the money put spread to sell.

XOM is trading $81 and you can sell the Mar18 76/71 put spread for around $.55.

You are selling this spread with the idea you will be collecting that credit as the stock goes higher.

Please note, I am not necessarily recommending these spreads – just using them as examples!

Thanks for Reading … See You Next Tuesday.

Licia Leslie