Bull Credit Spreads

You could utilize bull credit spreads if you have a neutral or bullish bias on

the underlying futures market. In this strategy you sell a close-to-the-money

put and buy a further out-of-the-money put. The idea is to collect premium

in a steady or rising market as time decay decreases the option’s value. The

purpose for doing a spread is to limit your risk in case an extremely unpre-

dictable adverse market move occurs. By selling the closer-to-the-money

put, you will be collecting more premium than you pay for the out-of-the-

money put you are buying.

Your risk is limited to the difference between the two strike prices minus

the premiums that you collected. The profit potential is also limited to the

net premium that you collect minus the commissions and related fees.

Again, it is important to know these fees so that you can work them into

your profit/loss calculations.

For those who believe in income-generating trades, a good example is

to use this strategy with stock index futures where options expire nearly

every month. Stock index futures attract these option strategists because it

is necessary to sell premium in an option market that has expensive values

to make the risk worth the reward. The higher the volatility, the higher the

premium is, especially for close-to-the-money puts. Stock index options

meet that criteria. In a slowly uptrending market, a trader can put on these

positions and collect premium, knowing what the risk and rewards are.

There is no need for precise timing to execute this trade strategy, only a

conviction that the futures market will remain at or above the same level by

the options expiration day. A margin requirement or good-faith deposit may

be required for this strategy.

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