OPENING AND CLOSING OPTION TRADES
Opening an Option Trade:
Using a put credit spread as an example where UnitedHealth (UNH) was selected using the options screening software.
1) Sell-to-Open the short leg at a $440 strike
2) Buy-to-Open the long leg at a $430 strike
A put credit spread strategy involves selling a higher strike put option (short leg) in exchange for premium income and then using some of the premium income to buy a lower strike option (long leg) while collecting a credit in the process. Both legs have the same underlying stock and the same expiration date.
Closing an Option Trade:
Although put spreads can co-expire worthless to capture 100% of the premium, closing trades out early to realize profits is recommended. The process is now reversed.
1) Buy-to-Close the $440 strike to close out the short leg
2) Sell-to-Close the $430 strike to out the long leg
This will allow you to close trades early in the option life cycle and realize gains.
Put Credit Spread Summary:
Trade Type: Put Credit Spread (UnitedHealth - UNH)
Sell-to-Open: 17MAR23 @ $440
Buy-to-Open: 17MAR23 @ $430
Premium Income Per Contract: $90
Required Capital Per Contract: ($440 - $430) - Net Premium Income = $910
Number of Contracts: 2
Net Premium Received: $179
Buy-to-Close $440 Strike: -$0.08 per contract for -$16.06
Sell-to-Close $430 Strike: $0.05 per contract for $9.42
Profit: $173
Premium Capture: 97%
ROI Per Contract: $87/$910 = 9.5%
A put credit spread strategy was selected using the options screening software. Put spreads are an ideal way to define risk and maximize returns in options trading. Put credit spreads are intended to capitalize on neutral or bullish price movement of the underlying stock. This strategy involves selling a higher strike put option (short leg) in exchange for premium income and then using some of the premium income to buy a lower strike call option (long leg) while collecting a credit in the process. Both puts have the same underlying stock and the same expiration date. When selling put credit spreads, it is important to follow the 10 rules of option trading while leveraging IV Rank.
Noah Kiedrowski
Founder and Managing Member
Stock Options Dad LLC
A Registered Investment Adviser (RIA) firm
