Before We Discuss Credit Spreads - Daily Update

What a crazy week this has been with a monstrous rally.

Last week in our podcast, we talked about overnight and 3 day weekend risks -- and how we bounced from 1800 all the way to 1930 in the S&P500.

This week, we dipped below 1900 towards 1890 - before rocketing even higher above 1940 - towards 1950+.

This week we had a very profitable week with a total of 4 trade - primarily credit spreads.

Our trade from last Friday reached close to max profit this past monday. We had ether MOnday or Tuesday to exit that trade and on Tuesday, we posted on our blog the potential for downside before upside -- and that's exactly what happened.

We were able to re-enter our bullish plays Wednesday morning and we ended up putting on 3 different bullish plays on Wednesday and Thursday at various times. The rally rocketed up even faster than it did from the 1800 lows --- our trades reached max profit. We also have some trades expiring next week - so we are holding those over the weekend to take advantage of time decay.

We finished the futures ending at 1944.

In yesterday's post Thursday, 2/25/16 S&P Hits 1950ES, As Predicted All Week!, we said ES hit 1950 - it actually kept going higher overnight all the way to 1968. However, during the day, it turned back down below 1950 all the way to 1942.
Yesterday's S&P500 Hourly Chart

Today's S&P500 Hourly Chart

This is a funky looking b-wave down. It doesn't look like how it should if that were the top. I have to be open to the possibility that I could be wrong, but given the size of the big wave A and the big wave B - it would be a bit awkward if the size of this big C is just less than 2 days. So I'm leaning towards a little bit more. Let's see how Sunday night trades.
3 Best Answers to What Is A Credit Spread

For a beginner starting to learn about credit spreads as they relate to options trading, it can be difficult to  really understand credit spreads and how they are useful -- why traders even bother with something that's more complicated than a simple buy or sell.

A credit spread is simply a paired option trade that results in your account receiving (rather than paying out) a net credit.

 But that doesn't really help you understand what it actually is and how it is useful for options traders.

 What you're missing is this: Credit spreads allow you to bet where the market won't go.

 Betting where the market won't go is my favorite definition of a credit spread.

 But just so you get the big picture of, here are 3 perspectives on what a credit spread is - starting with a theoretical take, then a practical trader's take, then a broker's take.

1) Credit Spread Textbook  Definition -
A credit spread is (most commonly) a 2-legged option trade of the same underlying stock/index with the same option expiration date -- but the difference is that each option leg has a different strike price, resulting in a spread difference in value between these two strikes.

 You short (sell) the strike that is closer to where the stock is currently trading at (hence you collect more money for this leg) -- and you long (buy) the strike that is further away (hence you pay out less for this leg).

 The net result is a net credit -- hence the name "credit spread" because you are shorting (collecting) the more expensive option while simultaneously buying (paying for) the less expensive option. Note this is opposite of a "debit spread" - in which the net result is that you pay out money to execute the trade.

 With credit spreads, the net result is that you receive money by executing the trade. So money money goes into your account with credit spreads, which is inherently opposite of what usually happens when you buy a stock, which involves money leaving your account. As rosy as this sound, this doesn't mean you get to keep that money -- because you are still under contract of those options you just entered -- but it does ...