Why Use Spreads on Almost All Futures Options Trades? – Part 1
Why Use Spreads on Futures Options Trades

Why Use Spreads on Almost All Futures Options Trades? (Part 1)

Unlimited risk is a term that doesn’t sit well with most non-professional traders. However, there are a few excellent ways to limit or almost limit the risk involved in selling futures options. But before addressing the actual trades, we will discuss why spreading is possibly the best and most advantageous way for the average trader to approach options.

Selling > Buying

Let me say at the outset that we at TradersTrading.com are not option buyers. As I’ve said before, buying options is a loser’s game. This is because one must make an accurate “guess” as to the direction a stock or commodity will go, how large the move will be, and how quickly the move will be made. If you’re skilled and successful at doing that you’ll be rich in a surprisingly short period of time!

As option sellers, the three items mentioned above do not factor in our forecasting. Our goal is to combine fundamentals with a few chart patterns that will help us determine where a particular commodity is least likely to go. This is a much easier and less risky approach! Now, with that said, we do buy options but it is almost always done so that we can complete a spread position that limits or almost limits the risk on our trade.

Our Spread on Spreads

There are many different spreads available to the average trader. However, only four spreads out of the dozens available to traders are used in our options trading. We will go into more detail on each of the spreads in subsequent blogs but first, here are the characteristics of our preferred spreads:

  1. You should not have to forecast market movement, as was mentioned above. You will (and should) have a bias as to upcoming movements, but you will be able to leave yourself plenty of room for error and still make a profit.
  2. The market should be able to go up, down, or sideways and yet, you’ll still make a profit. The strategy you select should lose money only if the market makes an unusual spike or fall in price, completely out of the normal or seasonal character of the commodity.
  3. With our credit spreads, if all options expire worthless, you make a profit. Utilizing any of the spreads I’ll discuss, your profit will come from the options you sell. The purchased options will protect and/or increase your odds of being profitable.
  4. Our spreads will work for you by smoothing out the often volatile up and down swings made by the underlying contracts. They keep you in trades for the long haul slowly move toward zero at expiration.
  5. Our spreads are easy to grasp and easy to implement.

In Why Use Spreads on Almost All Futures Options Trades? Part 2, I will begin discussing our preferred spreads along with when to empty them, their advantages, and their disadvantages. If you haven’t already, subscribe to our email list to receive notifications of new articles as soon as they post.

1 Comment

  1. thisandthatcarver@yahoo.com

    Really liked your article, I’m looking forward to completing the series. Thanks Jerry

    Reply

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