Credit Spreads Expalined and 3 Common Misconceptions

Much has been said about the options market lately. There are many investors who believe them to be too risky to trade. While a proper understanding of technical analysis is necessary in order to be profitable, a strategy called Credit Spreads greatly reduces the risk associated with options and increasingly volatile markets.

So what exactly are 'credit spreads'?

It is a strategy in which the stock's option is sold for a premium and another option is purchased. The difference between the two prices is the credit the investor makes if both expire worthless. This type of trading makes profiting in any market climate a possibility.

Just like anything, however, there are some misconceptions. Here are three of the most common:

First - Trading Credit Spreads is the same as 'day trading'

The most common misconception about this type of spread trading is the easy comparison to day trading. The two, in reality however, are vastly different. Unlike day trading, credit spreads are a relatively low risk income strategy. Day trading involves a high level of trading expertise and experience. It also requires nearly constant attention to the ever change market indicators and can be extremely time consuming. On the other hand, many investors avoid the daily stress of day trading by using this strategy.

Secondly - This strategy is difficult and time consuming to learn:

Learning any trading strategy involves a certain amount of personal discipline, however, the basic idea is relatively simple. Once the basics of technical analysis are understood, it is a very straightforward process. In fact, most traders begin trading credit spreads because of the reasonable time requirements needed to learn the process.

Finally - Credit Spreads is only for the "professional" floor traders:

The reality is this type of spread trading is for anyone looking to make consistent liquid returns on their money, with a significantly minimized risk. A main reason why many investors use credit spreads is the minimal amount of upfront capital needed in order to profit. Many people never get started in learning to trade because they think that it is necessary to have thousands of dollars saved up. This is a far more costly mistake.

The ability to profit with any market direction is crucial. Spreads allow the market to move in any direction, while maintaining profit potential. Once the proper timing techniques are mastered, this strategy can provide a compelling ROI with minimal risk.

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