Curious how you can trade cheap credit spreads to generate monthly income? Today, I’m thrilled to share my approach to trading cheap credit spreads and how I manage to limit my risk to just $25 per trade. This is an excellent strategy, and when traded wisely, they can be a consistent source of income.
What Are Cheap Credit Spreads?
Let’s start with the basics. Cheap credit spreads involve strategically placing bets that a stock will stay above or below a certain level. The term ‘cheap’ refers to the distance from the current stock price. The further away you go, the cheaper the credit spread, offering a higher win rate. However, with increased distance comes higher risk. I typically aim for a sweet spot, trading in the $20 to $25 range, balancing risk and potential profit.
My Simple Go To Trading Strategy
Now, let’s dive into the heart of my trading strategy. I use a 10-period moving average to identify the market trend. When the line is blue, indicating an upward trend, I lean towards put credit spreads. Conversely, when it turns white, signaling a downward trend, I opt for call credit spreads. The key is to identify strong support or resistance levels where I believe the stock will stay above or below.
Once I pinpoint a level, I structure the trade, collecting a premium (typically around $20 to $25) for a credit spread that totals $100. This sets my maximum risk at $100. However, here’s the game-changer: I implement a stop-loss strategy. If the stock breaks my chosen level, I exit the trade, limiting my loss to around $30, thus significantly reducing my risk.
Risk Management and My Results
By incorporating this stop-loss mechanism, I’ve managed to transform an $80 potential loss into a $30 loss, making my winners and losers more balanced. While this approach may slightly impact my win rate, the overall result is a more consistent and less stressful trading experience. This risk management strategy has enabled me to generate monthly profits ranging from $3,000 to $5,000.
In conclusion, trading cheap credit spreads doesn’t have to be a gamble. By carefully selecting levels based on market trends, structuring trades for optimal risk-reward, and implementing a stop-loss strategy, you can significantly enhance your chances of success. Remember, it’s not just about winning; it’s about managing your losses effectively. So, go ahead, explore this strategy, and may your trades be ever in your favor!
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Thanks for reading 🙂
CEO & Chief Strategy Officer