Options Trading With Credit Spreads (FULL Trading Plan w/ Results)

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Trading credit spreads is a very popular strategy among "income-based" traders, as credit spreads have limited loss potential and a high probability of profit.

However, high probability strategies come with a cost, which is unfavorable risk/reward. Typically, credit spread options strategies will have far more risk than reward, which means many profitable trades can be wiped out by one unprofitable trade.

In this video, I share my analysis of a put credit spread strategy applied to the S&P 500 ETF.

We'll explore the historical performance of simply selling put spreads in SPY every single month. After analyzing the results with no trade management, we'll look at the implementation of profit targets, stop-losses, and strategic entry filters to help improve the strategy's performance.

Lastly, I discuss exactly how to size credit spreads as part of a long-term systematic trading plan. I've included a final put spread strategy with various trade size allocations, as well as the historical performance of the strategy when using these allocations.

My hope is that this research will help open your eyes to the true nature of the "high probability" options trading world, the downsides that come with it, and how to work with these downsides to produce positive trading results long-term.

Be sure to leave a comment down below with any questions you may have!

=== RECOMMENDED VIDEOS/RESOURCES ===

[nickmfnjackson]

This may be the single greatest option trading video of all time. Ive recently started selling put credit spreads and making consistent profit but I always wondered if there was data available on this strategy. You, sir, have provided exactly what I was looking for. I wish I could like this video 100 times.

[markmcnair]

Wow. I have consumed literally hundreds and hundreds of hours of option education content and this might be the most valuable half hour I have ever seen. Well done sir!

[Slvrdo]

The strategy at 22:30 is what I do on a weekly time frame with 5% per trade, not the account. I've been averaging 3% a week. This is right on the money. Wish I saw this video before I started trading spreads.

[truckerd.j.djs]

This guy is really good at explaining stock options. I've watched so many of his videos over about 2 months. I have learned so much. I recently started trading options and have done very well with his advice. I like in this video he says if those gains are not good enough for you I don't know what to say. Lol !!! It's true this is not a get rich quick thing. If you can get a 30% return or better in a short amount of time ( a week or a month) that is amazing. Anyway thank you for the videos. Your videos have helped me make a few extra bucks a month. I pray that God will bless you for all the people you are helping with your knowledge.

[ngphil]

You definitely earned my sub for this vid. My mind is blown by the depth that you went into with your study. Amazing!

[GKSTR]

Phenomenal analysis, this channel is the absolute best. I will definitely be trying this strategy going forward. 👍

22:36 - Credit Spread strategy with management.
Entry: VIX < 30
Exit: T+30
Profit: 75%
Stop-loss: -150%
Size: 5%

[eztravelandcruises]

Wow! Chris, this is some amazingly useful information and a great demonstration of how the stop loss, profit target, and allocation size can affect profitability and draw downs. Thanks for the hard work putting this together!

[kenhilliard]

If you're selling naked puts, couldn't you manage the downside risk with a stop loss instead of using a put credit spread? This would provide a significantly higher profits as you don't have to buy a put option to hedge the short put?

[JustinFur]

If I make my spread that wide it risk soo much more that the profit. But if I sell and then buy to cover two strikes lower it makes it more worth it. Still a high probably of being a successful trade with the profits being lower than the loss but that ratio in the difference is better

[ThePhinista]

I wonder how well rolling the spreads out will work when the trade moves against you as opposed to just eating the loss. For example, if a stock is over sold and is likely to recover, it would make more sense to roll the spread and take a small loss or even roll it for a credit if your lucky and just have the new spread expire worthless as the stock recovers. This way you can avoid taking massive losses when the decrease in the stock price isn't really justified or supported by any of the company's fundamentals.

[charlielu]

Hi Chris. This is a great video. Just a quick question: where did you access the option historical data for this back test? Thanks a lot!

[cmrncrick]

Who did you use for all of your back testing? I've been looking for a good service to back test strategies like this.

[jiaminzhu]

Wow. This is great material. One missing piece that I am looking for is the trade-off between position size and spread width. How to compare wider spreads and less contracts vs narrower spreads and more contracts. For example, if I want my max loss to be less than $5000, then how do I decide among ten $5 wide spread, three $15 wide spread or one $50 wide spread? I know options are all about trade-off but I don't have a clear view now about the trade-off between these two choices.

[Megrogs]

What a great video to come across as I’m trying to get into credit spreads! An updated video of this content would be great. Thank you for the great content!

[joyjones]

I'm new with put credit spread and never used stop loss for the two trades I made prior to watching this video. this video just got me a little confused after a while. I need help understanding this stop loss setting concept.

[chrisformoso]

how do you monitor the credit spread price for stoploss/takeprofit intraday without staring at the screen all day? or is there a way to enter these orders/rules before hand in tastyworks?

[MyAcresOfDiamonds]

i'd be curious how all this would differ if you used weekly options

[jdmxxx]

I like the strategy and analytics. I suggest the performance of the cumulative would be affected by yearly taxes. A typical marginal rate of 25% would change things a bit. I appreciate your work and have learned a good deal from it. Thank you much!

[michaellima]

Hey Chris, thanks for this very comprehensive video. Much appreciated. You have indicated entering this particular trade when VIX is below 30, which is a useful and specific guideline. Both Option Alpha and your friends at Tasty Trade indicate that one should not sell options for any particular ETF or stock unless IVP or IVR is at least 50 and the higher the better. Your statement "Contrary to popular belief, lower implied volatility environments are very favorable for options-selling strategies, as realized market volatility is low." seems to contradict the other guys. I'm unsure how to interpret your statement for all other ETFs/stocks when selling options. What does "lower implied volatility environments" mean as that is a relative description vs what you indicated for the SPY trade described in the video (enter when VIX is below 30)? Can you quantify or be more specific in your guideline when selling options for other ETFs/stocks?

[sanketsawant]

To avoid all bear phase, wt will be vol filter? I see 2015-16 was bearish phase, to avoid that, do we have other filter or vol is the only one?