Let’s cut to the chase: volatility. What is it? In the trading world, it’s the wild swings a stock price takes — up, down, sideways, you name it — and it measures how wildly these prices can move. High volatility? It’s like riding a rollercoaster. Your stocks might skyrocket or plummet, and that spells big bucks or major losses. Low volatility is more like a calm river, not much action but predictable and smooth sailing. 

Now, let’s talk brass tacks. Volatility is a double-edged sword. It’s your best friend when you know how to capitalize on those wild swings; it’s your worst nightmare when you’re caught off guard. It opens the door to massive profits if you can predict the market’s mood swings, but it also risks big losses if you misjudge. 

Onto the typical trader’s playbook: most traders stick to what they know. They buy on dips, hoping for a rebound; they load up during calm consolidations, betting on a breakout; or they chase strength, jumping on a stock in motion. This strategy might make you feel like a champ during a bull market, when everything’s on the up and up. 

But here’s the kicker: what happens when the market stops playing nice? When it stalls or starts to backpedal? That’s when the one-trick ponies start to sweat. Buying stocks in a flat or falling market is like trying to squeeze water from a stone — it’s frustrating and fruitless.  This is where many inexperienced traders suffer because they have never spent the time to educate themselves in the opportunities available in options trading. 

Options — those magical financial instruments that let you bet on market directions without ever owning a stock. They’re the secret sauce for turning a profit in any market condition. With strategies like credit spreads, you’re not just swinging at every pitch; you’re playing a smarter game. You can make money from market drops, sideways movement, and even minimal gains. 

Instead of only betting that UP is good, and credit spread option trader is in essence saying that I don’t think the market will reach these levels over this time frame and if so, I will be compensated for my perspective. 

Options don’t just open new avenues for earning — they’re a lifeline when the market turns rough. They’re about making calculated moves with less risk than buying stocks outright. You’re not just playing the game; you’re setting the rules. 

An options contract functions essentially as a future agreement between two parties, fixing the price of a stock at a predetermined level, known as the strike price, before the contract expires. It’s akin to securing a booking at a premier restaurant — you’re reserving your place, whether you decide to dine or not. 

In the realm of options, we encounter two primary types: 

• Call Options: These instruments grant you the buyer the right to purchase a stock at a pre-set price. Opting for a call option is a strategic move when you anticipate a stock’s price will escalate. It’s comparable to locking in the price of a collectible, predicting its value will surge in the future. 

• Put Options: Conversely, put options provide you the right to sell a stock at a stipulated price. If market trends suggest a decline, securing a put option allows you to offload the stock at today’s rate later, effectively safeguarding against potential depreciation. 

The strategic advantage of options trading lies in its capacity to furnish traders with manifold investment pathways, irrespective of the stock market’s trajectory — upward, downward, or sideways. This versatility is crucial, particularly in managing investment risks and hedging against market fluctuations. 

For novices in trading, the allure of options trading includes several key benefits: 

• Lower Initial Investment: Options allow investors to control substantial quantities of stock for a fraction of the direct purchase cost, providing significant leverage. 

• Adaptability: The myriad of available strategies enables traders to align their market activities with their risk tolerance and outlook. 

• Risk Mitigation: Properly utilized, options can serve as a protective measure, shielding investments during downturns. 

• High Return Potential: Although inherently risky, options can yield considerable returns, especially if the market’s movements are accurately anticipated. 

Options trading opens up a unique dimension for traders, offering a dynamic method to engage with the stock market’s potential for growth while concurrently managing exposure to risk. Whether aiming to speculate on stock price movements, hedge existing portfolios, or generate income, a robust understanding of options constitutes a vital component of any investor’s toolkit. 

So, while the rookies are biting their nails over their stock buys, the pros are making moves with options that could pay off big, no matter which way the market sways. That’s the power of versatility in trading, and that’s how you play to win in the game of volatility. In this article we will explore how options traders create better risk/reward scenarios for themselves through the strategic use of selling risk managed options credit spreads. 

The $VIX is kind of like a weather forecast but for the stock market! Imagine it tells you if the stock market is expected to be stormy or calm in the next 30 days. It looks at something called “S&P 500 index options” (which are like agreements to buy or sell stocks at future prices) to figure out how bumpy or smooth the market might be. 

Here’s why keeping an eye on the VIX is a good idea: 

1. It shows how nervous or confident people are about the stock market. If the VIX number is high, it means a lot of people think the market might go up and down a lot, kind of like expecting a big storm. If it’s low, people think the market will be calm. 

2. It helps with planning. Just like knowing a storm is coming helps you prepare, knowing the market might get wild lets investors plan better, maybe by protecting their money. 

3. It helps in making a varied investment. By knowing when the market might get rough, people can spread their investments to try to avoid big losses. 

Even though the VIX doesn’t tell us exactly which way stock prices will go, it’s super useful because it warns us about how choppy the market could get. This lets investors get ready, just like how you might grab an umbrella if you knew it was going to rain. 

Traders monitor the $VIX by comparing its current monthly, weekly or daily value to its most previous value.  On the monthly chart above, a GREEN CANDLE would be perceived as an increase in the $VIX and the expectation of greater volatility.  Traditionally GREEN candles on the $VIX are bearish for stocks.  On the flip side when the VIX falls, stability prevails in stocks.  Thus, RED candles on the $VIX are traditionally perceived as Bullish for stocks.  As you peruse the $VIX chart above, pay attention to the magnitude of the wicks on each candle which are telltale signs to the magnitude of volatility that can occur in a given month. 

Many novices gravitate towards buying options, attracted by the allure of limited risk and the potential for unlimited rewards. It’s a compelling concept on paper, certainly, offering an appealing safety net for those cautious about direct stock market exposure. However, it’s crucial not to overlook a fundamental aspect of options: they are, inherently, depreciating assets. The stark reality is that most options buyers are likely to struggle because of this characteristic.  Many novices learn the ropes through a trial by fire. Enticed by the prospect of limited risk — where the most they stand to lose is the premium paid, these traders jump into the market with eyes wide open to the tantalizing possibility of boundless rewards. Seduced by dreams of striking it rich, they often overlook a harsh reality: most options expire worthless. This brutal lesson in market dynamics underscores not just the allure of potential gains but also the cold, hard truths of probability and market timing. 

Here is a graphic which explains the challenges a trader faces whenever they buy a call option. 

For a call option buyer to turn a profit, the mechanics of options trading demand not just an uptick, but a significant one: the price of the underlying asset must not only exceed the strike price, but also cover the premium paid for the option. It’s a race against time — the entire setup must occur before the option’s expiration date. This introduces a critical layer of complexity and urgency, as the window for achieving these gains is tightly bounded by time, underscoring the high-risk, high-reward nature of options trading. 

More seasoned and sophisticated traders, on the other hand, often take a different approach by selling options and collecting premium. This strategy allows them to tilt the probabilities in their favor significantly. By selling options, these traders aren’t just playing the game; they’re setting the rules. But let’s be clear, the key to success in selling options lies in meticulous risk management. The astute trader must master the art of mitigating risks to harness the full potential of using credit options strategies effectively. 

Let me explain. 

An options seller is creating an obligation.  They are receiving premium today into their account and obligating themselves to fulfill a contractual agreement. 

Let’s say XYZ is trading at 90. 

You as an option seller agree to sell the March 100 Call option at $2.  This obligates you to deliver the XYZ stock at $100 between now and the March expiration.  In exchange for this obligation, you receive $2 into your account now. 

At any price over $102 at expiration you as the seller will lose money.  We calculate this by simply adding the premium of $2 to the $100 strike price. 

At any price under $100 the option will expire worthless, and you will keep the entire premium in your account. 

But let’s take this strategy one step further to minimize the risk even more and explain the brilliance of credit spreads. 

In a credit options spread, the trader is essentially taking a position based on the belief that the stock price won’t hit a certain level within a specified period. By selling options, the trader collects premiums upfront, betting that these options will expire worthless if the stock price stays below the strike price of the options sold. If the prediction holds true, the trader retains the premiums as profit. 

However, to manage risk and cap potential losses, the trader simultaneously buys options at a higher strike price. This creates a spread. If the stock price moves against the trader’s initial assumption, the bought options help limit the losses to the difference between the strike prices minus the net premiums received. This strategy allows the trader to define risk and potential return at the onset, making it a calculated risk rather than a speculative guess. 

Think of it like placing a bet on where a stock price won’t go. A credit options trader basically says, “I bet the stock won’t reach this particular price by a certain time.” If the trader is correct, they earn a reward, which is the premium from the options sold. If the trader is wrong and the stock does reach that price, they’ll have to pay out, but the loss is capped. This is because they’ve set up a risk-managed spread, by purchasing the higher strike prices where the maximum potential loss is limited to the difference between the strike prices of the options involved. Essentially, it’s a way to profit from predicting what won’t happen, with a built-in safety net to control losses. 

Let’s say that the March $XYZ 105 call option is trading at $1. 

To create a credit spread a seasoned player would say to themselves, I don’t think the market is going back to $100.  But what if I am wrong? 

To eliminate risk they would sell the $XYZ 105 call option at $1. 

As a review here are both legs of the credit spread: 

Sell to OPEN the March $100 call at $2 

Buy to Open the March $105 call at $1 

The maximum profit that can be achieved is the net premium received.  This will occur at any price less than the $100 strike price. 

The maximum loss will occur at the higher strike price of $10 or higher and will always be capped at the difference between the strike prices of $5 less the $1 initial credit premium received. 

As long as the price stayed below $100 all of the options would expire worthless. 

The risk on this particular trade takes place at the price of $105 or higher. In this regard the $100 calls would be worth $5 at expiration, and since the credit spread was sold for a credit of $1, the net loss would be capped at $4. 

This loss is substantial.  But for the loss to occur the market would have to rally $15 before the expiration date.  So, an option credit spread trader is constantly playing the probabilities of determining what is the probability that should a price move will occur? 

Option credit spread traders operate under a fundamentally different paradigm compared to traditional stock traders. While the latter may live and die by the pulse of every price tick, credit spread traders play a more stoic game of probabilities and patience. They make their money by betting against certain price levels being reached within a specific timeframe. By selling spreads, they receive a premium upfront, wagering that the market won’t breach their set boundaries. This isn’t about predicting where the stock will go, but rather where it won’t go, turning their market perspective into a boundary-laden map where safety zones generate income. This approach requires a disciplined adherence to risk management, as the real profit lies not in the movement, but in the absence of it reaching the extremes. 

This strategy invites a different kind of chart analysis. Traditional traders might obsess over potential breakout or breakdown points, but for someone inclined towards credit spreads, it’s the areas of unlikelihood that hold allure. The next time you find yourself staring at a chart, consider not just where the price might shoot or plummet to, but where it likely won’t reach. Can you identify those remote zones that seem just out of reach for the stock between now and the next expiration of your options? If you can, the niche of an option credit spread trader might just suit your style. Here, the focus shifts from chasing the price to defining and profiting from its limits, offering a different kind of trading opportunity. 

Studying options trading requires some time.  But it can be well worth your effort. 

Here’s why every trader might want to cozy up to options: they are the crème de la crème for manipulating market probabilities in your favor, thanks to the magic of time decay. You see, as options approach their expiration, their value diminishes, setting up a sweet spot for those who sell them to benefit from this inevitable erosion. But — hold your horses — it’s not just about counting your chips as the clock ticks; understanding and managing the risks involved is crucial. This isn’t rocket science, but it does demand a chunk of your time to master. Dive into the world of options, learn the ropes of risk management, and you could find yourself riding a wave that most traders only dream about. 

Listen up: when you nail it just right, credit spreads are like a well-oiled income machine. They’re a slick, structured way to rake in cash while keeping a tight leash on your risks. Especially in those snooze-fest, low-volatility markets, they’re a downright amazing strategy for pulling in steady profits without sweating the small stuff. 

I’d like to extend to you a personal invitation to our complimentary “Learn to Trade with A.I.” Masterclass. Here, we unlock the transformative potential of artificial intelligence for everyday traders, introducing advanced techniques such as neural networks and intermarket analysis that are vital for swiftly and effectively pinpointing trading opportunities. 

Prepare to be astonished by the capabilities of A.I. It could revolutionize your understanding of the markets. 

This masterclass is where modest traders learn the art of consistent growth, cleverly carving out small yet strategic gains from the financial markets. 

In today’s trading environment, Artificial Intelligence, Machine Learning, and Neural Networks transcend mere tools — they are critical shields for your investment arsenal. 

A.I. delves deep with sophisticated pattern recognition, crunches through hundreds of thousands of data points, and executes millions of calculations — all to isolate the most probable trading opportunities. It’s an indispensable ally in distinguishing hard facts from market noise. 

While I hold my personal predictions dear, I steadfastly rely on the forecasts from our A.I. systems. It’s this synergy of A.I. and options trading that empowers Power Traders to nurture and expand their portfolios. 

Experience firsthand how Vantagepoint’s artificial intelligence demystifies and enhances the trading process for traders daily. 

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It’s not magic. It’s machine learning. 

Make it count. 

THERE IS A SUBSTANTIAL RISK OF LOSS ASSOCIATED WITH TRADING. ONLY RISK CAPITAL SHOULD BE USED TO TRADE. TRADING STOCKS, FUTURES, OPTIONS, FOREX, AND ETFs IS NOT SUITABLE FOR EVERYONE.IMPORTANT NOTICE!

DISCLAIMER: STOCKS, FUTURES, OPTIONS, ETFs AND CURRENCY TRADING ALL HAVE LARGE POTENTIAL REWARDS, BUT THEY ALSO HAVE LARGE POTENTIAL RISK. YOU MUST BE AWARE OF THE RISKS AND BE WILLING TO ACCEPT THEM IN ORDER TO INVEST IN THESE MARKETS. DON’T TRADE WITH MONEY YOU CAN’T AFFORD TO LOSE. THIS ARTICLE AND WEBSITE IS NEITHER A SOLICITATION NOR AN OFFER TO BUY/SELL FUTURES, OPTIONS, STOCKS, OR CURRENCIES. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE DISCUSSED ON THIS ARTICLE OR WEBSITE. THE PAST PERFORMANCE OF ANY TRADING SYSTEM OR METHODOLOGY IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. CFTC RULE 4.41 – HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.