In our trading we like to have certainty, because
unfortunately we do not have a crystal ball to tell us where the stock market
or stock is going. So we have to use some
other tools that we can use to put the trade in our favor. Now notice I did not say every trade will be
a winner we just want to put the percentages for us and not against. Commonly selling an Out of the Money (OTM)
Credit Spreads is how we can accomplish getting into a position where the trade
will go in our favor.
Finding A High
Probability Trade
The first thing that you need to do is you is look at a
chart and at price action because you need to define the trend, is it bullish
or bearish, and what kind of strategy you can use. If the stock is moving down
its more likely you would use a Bear Call Spread on the other hand you can use
a Bull Put Spread when a stock is beginning to trend up or has found some
support.
A common tactic for setting up an (OTM) spread will be based
on support or resistance, and where a the top or bottom of a bollinger band
is. By placing the trade in what I call “the
high probability zone” you increase your
chances of succeeding in the trade.
In this bearish example Proctor and Gamble was in a short
term uptrend in February but was unable to punch higher in March showing that
the price was resistant at the $67 price level and notice the bollinger bands
also let us know that the price is not as likely to pierce the upper band. Under these conditions is where a high
probability trade would exist.
A more bullish example is Goldman Sachs in July of 2012 it
had been in an extreme downtrend, but began to establish some support on July 1st
when it created an equal low, when it bounced up At $90 you can see the area
below the Bollinger band and $90 that Goldman had a difficult time breaking
which means it had established some support.
So by selling a Bull Put Credit spread below $90 or further out you would have been putting the trade in your
favor.
A number of different trading platforms have ways to analyze
the probability of a spread succeeding and it would be very wise that before
you make the trade you analyze the option and the risk before pulling the
trigger.
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