p Ken Trester, Managing Editor p Jeff Carter, Senior Editor p Ron Jackson, Publisher

Investor Jiu-Jitsui - The 88% Tactic Credit Spreads by Jeff Carter

The best thing about stock options is that you can use them to profit in any market -- up, down or flat.

And almost as good as that, is that you have numerous ways with which to use them.

Most traders know the basics with stock options. You buy an option, and if all goes right the option will quickly increase in value, at which time you sell the option and pocket your profit.

You may not be familiar with spreads -- the usual recommendation from Ken Trester in the Thursday issue of The Complete Option Report.

Spreads turn the options world upside down and in this case you WANT the option to expire worthless. 

Of course when you buy an option you want it to to expire in the money.

We call this credit spreads “Investor Jiu-jitsu” and here's why...

You've heard of jiu-jitsu -- it's an oriental form of combat. The primary tactic is to use your opponent's strength against him and, at the same time, find a weak spot that is unprotected.

That’s what this tactic is all about -- using the market’s momentum against itself.

It’s about taking advantage of leverage and piling on the profits month after month. It’s about the individual trader -- like you -- taking money that the big guys aren't protecting.

Too Good to Be True?  Not at All
The Investor Jiu-Jitsui trading tactic Ken Trester uses is technically called a credit spread.

Ken has used this tactic over the years to profit with more than 88% of the time.

Ken uses credit spreads to make profits while others are losing money and you should too.

It would be a mistake to not consider credit spreads as part of your money making arsenal.

Because a credit spread puts you on the opposite side of losing trades, and onto the side of winning trades. A credit spread takes an options negative and turns it into a positive.

So why are credit spreads shunted off to the corner of the options market?

Primarily, because they don’t stand up and scream, “look at the big profits I just made!”

Another reason credit spreads operate in relative obscurity is because many of the pros who trade them like it that way.

The Mechanics – How to Do It
All investing involves one simple premise -- you sell something for more than you bought it. Credit spreads are no different in that regard.

The difference between what you buy an option for and sell it for is your profit. The premise of buy low and sell high remains.

With a credit spread, all you are doing is selling an option that you think is going to decline in price. If the price does indeed decline, you make a profit. If the price falls to zero, you make 100% of your expected profit.  

So the first order of business when you open a credit spread is to “Sell to Open” an option you think is going to decline in price.

Don’t worry Ken will give you exact instructions on how to trade and sell in The Complete Option Report.

The Protection
Your second order of business when you open a credit spread is to “Buy to Open” a similar option.

The option you Buy to Open will cost less than the option you Sell to Open.

The difference between the prices is your profit for the position.

With a credit spread, when you Buy to Open an option to complete the position, you dramatically reduce your risk. In fact, your risk is the amount of the spread, generally only $250 or $500 per contract.

You do not need to worry about having money to buy the stock. You only need enough money to close the spread in a worst case scenario.

This dramatic risk reduction works hugely in your favor -- it dramatically reduces the amount of cash you need on hand for collateral.

For example, with a 5-point spread, you will need $500 to close a worst-case scenario. And in all likelihood, you will close a losing position well before it reaches its maximum loss.

Don’t worry if the option you Buy to Open expires worthless. That is part of the plan.

Its role is to provide you with protection. The option you Sell to Open is your moneymaker. And the income you receive from Sell to Open is yours to keep regardless of what might happen later.

Some Examples
Ken recommends a new credit spread every week, if possible. Here was a recent recommendation…

Put Credit Spread to Open -- Sell to Open Occidental Petroleum (OXY) Feb 40

Put and Buy to Open OXY Feb 37.5 Put at a spread credit of .3 or higher.

A put option profits when a stock price falls. So this is a bullish position in which you want OXY to stay above 40 until February expiration.

If that happens, the price of the Feb 40 Put will fall to zero. The price of the OXY 37.5 Put that you Buy to Open will also fall to zero, but that doesn’t matter. It’s job is to provide protection and lower margin requirements.

This position generates a 12% return on margin (144% annualized) for a one-month holding period.

Plus, you will not only be opening one contract, but several. It is not unusual to open 10 contracts of the same credit spread.

And it is likely that you will open more than one credit spread every month, involving several contracts with each spread. That kind of action is sure to satisfy many trading accounts, considering the percentage success rate Ken Trester’s recommended credit spreads have shown.

In fact, the greatest danger with credit spreads is not the tactic itself, but that you might open too many positions. As with any investment tactic, it is best not to go overboard.

Don’t get greedy.

No doubt you have noticed in this example the relative low profit amount.

That is Ken’s preference. He wants a credit spread to expire worthless, and to achieve that he goes as far out of the money as possible with his Sell to Open option.

More aggressive traders might want to Sell to Open closer-to-the-money options. You can certainly produce greater percentage profits that way, but you will also be more exposed to having the Sell to Open option going in the money and creating a loss.

That is all there is to it.

Stay disciplined, don’t open too many credit spreads at one time, maintain the personality that a lot of a little is better than a little or nothing of a lot, and you will find yourself making some of the easiest money to be made trading options.

Best of All
With every spread recommendation in The Complete Option Report Ken gives you exact instructions on how to open and close the trade.