- A. You feel confident that the underlying stock or futures contract will remain in a particular range,
- B. Volatility is high enough to justify selling premium,
- C. You are not comfortable selling naked options and want to limit your risk.
To set up a double credit spread, the trader would do the following:
If XYZ is trading at 100
Sell 10 Aug 95 Puts @ 5
Sell 10 Aug 105 Calls @ 6
Buy 10 Aug 90 Puts @ 4
Buy 10 Aug 110 Calls @ 5
By selling the 95/105 spread, the trader is essentially selling a strangle and exposing himself to unlimited risk on both sides of the trade. To protect himself from unlimited risk, the trader then purchases further out of the money puts and calls which still results in a net credit.
When To Exit Double Vertical Spreads
- Establish the trade so that your maximum risk on this particular trade is below your maximum allowable risk level for any given trade and then simply hold trade until expiration.
- Exit trade when 80-90% of maximum profit is obtained. This will involve paying 4 more commissions when trading stock options.