FREE Ratio and Credit Spreads Options Trading Program

The ratio and credit spread trading program has been designed to capitalize on the high probability that a certain category of out-of-the-money options will eventually expire worthless. By seeking out and targeting these specific options for writing ratio and credit spreads, we expect to gain a trading advantage.

We are proud to be able to offer all CFT clients and visitors FREE email ratio and credit spread strategies. We send members our S&P bull put and bear call credit spread trades, as well as our credit and ratio spread trading setups for many commodity option markets. This is a great way to trade commodities without the exposure inherent in buying and selling futures. In addition to giving you greater margin leverage with your capital, our ratio and credit spread option trading approach offers a more relaxed trading experience,  providing just the right balance between the demands of trading and your busy schedule, as well as a way to diversify across several markets and styles. Plus, all the trades can be handled for you by CFT should you not want to execute trades yourself. Register for free here!

Our trading experience and research has shown that, in the long run, the writer of options should have a higher return on investment than the buyer. The primary advantage of writing ratio and credit spreads is that the investor has the ability to profit from time-value decay. As time goes by and we get closer to options expiration, the value of an out-of-the-money option will tend to diminish as long as the volatility remains constant and the underlying market does not make too big an adverse move. If, upon expiration, the ratio or credit spread is out-of-the-money it will expire worthless and the seller will keep the premium that was originally collected. Often we can close the positions for a profit before expiration.

Selling out-of-the-money options allows the investor to profit from sideways markets, trending markets, and occasionally money is even made when the underlying market moves against the writer's position! This technique is used by most seasoned options veterans, but the public unfortunately remains mostly on the option buying side. Time to get smart about trading options. Avoid the buyer's dilemma by writing ratio and credit spreads and profiting from time-value decay.

Credit Spread Selling Strategy

CREDIT SPREADS

Credit spread trading involves selling a call or put (or both) that is a certain percentage out-of-the money and simultaneously buying a call or put that is farther out of the money (this generates a credit in your trading account). The call credit spread is also known as a bear credit spread and the put credit spread is also known as a bull credit spread. By selecting calls and/or put spreads far enough out of the money and far enough out in time (3 months typically), the position captures enough premium and then profits from the time-value decay of that premium, often even before the expiration of the contracts. In fact, the position can be closed at an earlier date, and a new position initiated for more premium credits. These work well with S&P 500 stock index options and on a number of commodity markets that we track.

Other writing strategies

THE RATIO WRITE

The ratio write is a strategy in which multiple options are written against each underlying futures contract. This, in effect, creates simultaneous covered and uncovered option positions. Ratio writing involves either selling two or more calls against a long futures position or selling two or more puts against a short futures position. This strategy takes advantage of the fact that option premiums generally do not move cent-for-cent with futures prices. In other words, the delta of each option is less than one. This strategy enables the investor to potentially profit in the futures contract, and at the same time retain all of the premium if the options expire worthless.

THE COVERED WRITE

This is a strategy which combines a futures position with a short option. A covered call write consists of a long futures and a short call; a covered put write consists of a short futures and a short put. Both strategies are used only when an investor expects little volatility in the futures price. Covered call writes are generally used when an investor thinks the futures will exhibit an upward bias. Covered put writes are used when the investor’s outlook is neutral to bearish. In a covered write, profits in the futures position will more than cancel the potential adverse move in the option premium, allowing the investor to earn a profit. If, on the other hand, the futures moves adversely there will be a profit in the short option that might or might not completely offset the loss in the futures. For the covered option writer, then, the ideal market is one in which the futures prices remain flat and the
options expire worthless.

Disclaimer: Transactions in options carry a high degree of risk. Purchasers and sellers of options should familiarize themselves with the type of option (i.e., put or call) which they comtemplate trading and the associated risk. Selling ("writing" or "shorting") an option generally entails considerably greater risk than purchasing options. Although the premium received by the seller is fixed, the seller may sustain a loss well in excess of the that amount. You should calculate the extent to which the value of the optons must increase for your position to become profitable, taking into account the premium and all transaction costs.

There is risk of loss from trading options and futures. Trade with risk capital only. To read our full disclaimer, click here.