Trading $SPX Credit Spreads? Answer These 5 Questions First
$S&P 500(.SPX)$ is my daily bread and butter. I trade both naked calls and puts, as well as credit spreads.
This morning, I sold out-of-the-money puts and calls and collected 100% of the premium.
But collecting premium is the easy part. Knowing what you're risking is what separates a plan from a gamble.
Before selling a credit spread, ask yourself these five questions:
1️⃣ What's my thesis?
Am I bullish, bearish, or expecting a range-bound market? What evidence supports that view?
2️⃣ Where am I wrong?
Identify the price action that would invalidate the trade. If the market moves against your thesis, know when to reassess.
3️⃣ What's my maximum loss?
For a standard credit spread, maximum loss is generally the spread width minus the credit received, multiplied by $100. Don't forget fees.
4️⃣ What could move the market?
Check earnings, economic data, and Fed events. A sudden volatility spike can quickly turn a high-probability setup into a losing trade.
5️⃣ How will I exit?
Set your profit target and loss limit before entering. Have a plan for expiration, especially if the underlying approaches your short strike.
⚠️ A high win rate doesn't guarantee profitability. One oversized loss can wipe out many small wins. Credit spreads limit risk compared with naked short options, but they don't eliminate it.
Trade the plan, not just the premium. 🛡️
Markets are always moving - and sometimes, the best move is knowing what works for you.
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