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  • Credit Spreads Versus Debit spreads
    I was asked by serveral students why I was implementing a debit spread strategy versus a credit spreads on GLD.  The main reason is the reward to risk, as you now trading is about having an edge.  One of the ways my system has an edge is with a good reward to risk ratio. The way I structure vertical debit spreads is with at least a 2 to 1 reward to risk ratio.
     
    Lets say you are right just about 50% of the time and you risk $100 per trade:
    for every 4 trades you do
    with a reward to risk ratio of 1 to 1 = you loss money with commission & spillage
    with a reward to risk ratio 2 to 1   = you make  $200
    with  a reward to risk ratio 2.5 to 1 = you make $300
    In my experience I have found Debit spread to work best in directional market, & even better in up trending markets.
    Credit spreads I like to implement at possible tops or bottoms, and in markets that are trending sideways.
    The fact that selecting when to enter a debit or credit spread is very similar, but I like to analysis the market conditions and the underlining to select which strategy gives me the best possible return.
    for more Options education sign up for my free options course and options defination guide. 

    http://incometrading.com/optionstrading/

     



    Mar 04 12:37 PM | Link | Comment!
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