Option Spread Strategies

Certain option spread strategies are considered the most effective in generating income or short term option trading profits. I trade a credit spread option strategy most often (a/k/a vertical option spreads). To show one example, there is a day trade I made one Friday when the ES futures were up about 25 points before the open - a massive gap up. It shows what is possible when trading credit spreads.

A gap as big as 25 points in the ES is referred to as a "pro gap", which doesn't give most people a chance to get in, and probably isn't going to retrace significantly. So I was looking for a chance to sell a put credit spread in the first half hour, while there was still a lot of premium left, as far away from the market as possible.

Credit spread option day trade - SPX

This credit spread option trade was put on at almost one standard deviation away for the day. One standard deviation has about a 68% chance of not going the total distance against you, in this case 1870 (shown in the picture by the vertical line at left).  The vertical option spread above is shown at expiration with a $500 profit, not too bad for an option trade lasting a few hours and took $4500 to put on.

The vertical line at the right is where SPX closed (1887), and it never significantly retraced the move, and the ticks remained above zero for much of the day. SPX could have come back down though - there are no guarantees when trading credit spreads!

But the probabilities in this case favored that the gap up would probably not be filled that day because it was a large pro gap and the market internals (ticks mainly) favored a  sustained move. Day trading stock options or index options can be a risky proposition, so you need a trigger or a reason to get you into a trade like this, but it shows the potential benefit of trading credit spreads even on a very short term basis.