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The Dual Credit Spread Option Trading Strategy

TradingTrainer.com's BlackBox Options Trading System

Introduction to Dual Credit Spread

When the market trades sideways, the Dual Credit Spread strategy can be utilized.  This option trading strategy seeks to capitalize on the value decay of the option over time. The Dual Credit Spread strategy involves buying and writing 4 separate options at different strike prices within the same expiration month.  More popularly known as the Iron Condor, this strategy revolves around the writing ( or selling) of out-of-the money call and put options that have high mathematical probabilities of reaching expiration without being exercised. Although the earnings potential for this strategy is relatively limited, the main object of this strategy is to protect against catastrophic losses when the market moves from neutral towards the direction that is against your bias.  A typical trading duration for this Iron Condor is between 3 and 5 weeks.

 

Detailed Explanation of Dual Credit Spread

 

As it name implies, this strategy utilizes two separate spreads.  The first credit spread consists of writing an out-of-the money Call and buying an even further out-of-the-money Call for the same expiration month.  The second credit spread consists of writing an out-of-the-money Put and buying an even further out-of-the-money Put for the same expiration month.   In essence, the Dual Credit Spread strategy utilizes a combination of a bullish option "strangle" (long a call and put), and a bearish option strangle that is closer to the market... both in the same expiration month. Risk control in Dual Credit Spreads. If the "Dual credit spread" strategy has been used, with both calls and puts being sold, and the size of both spreads is equal, then the maximum risk is defined by the total potential value of either spread (calls or puts), minus the credit received for both, plus commissions and fees. This is because, at option expiration, only one "side" of the trade, either the call spread or the put spread, has the potential to have value.

If the Iron Condor strategy is used properly, with both calls and puts being sold, and the size of both spreads being equal, then the maximum risk is limited to the total potential value of either spread (calls or puts), minus the credit received for both, plus commissions and fees. This is a predictable and/or defined risk, because at option expiration, only one side of the trade ( either the call spread or the put spread) has the potential to have value.  On the other hand, the maximum profit potential is also limited because the maximum gain is equal to the total net credit of the bear Call spread and the bull Put spread.  The maximum profit potential is achieved if the underlying stock price remains above the sold Put strike and below the sold Call strike prices.

To see practical applications of the Iron Condor option trading strategy, visit the cashflowheaven.com website. The site provides an options advisory newsletter where most of the recommended trades take advantage of the option's time decay and the mechanics of the trades revolve around the dual credit spread method.

For an in-depth study on options and option related information, visit the Options Industry Council to download options trading seminars and ebooks.

For the experienced trader who wants to obtain a general knowledge on options trading and an in-depth practical guide to option trading strategies; or for the novice trader who wants to  learn how to trade options, visit the Trading Trainer website.  The site maintains a mentoring program, complete with a daily audio and video newsletter that provides broad market analysis, daily stock and options picks, daily technical analysis of the stock picks and a weekly two hour live discussion with the teacher, AJ Brown.  Interested readers are referred to AJ Brown's options trading review page, where special free offers and signup promo codes may be available for download.

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