If your investment risk tolerance is low, stock options can feel daunting. However, there are ways to mitigate the risk that goes along with options contracts. One of those ways is through a credit spread.
People open credit spread options to counterbalance the risk associated with puts and calls. You just need to know how to close a credit spread on your preferred investment platform when the time comes.
What is a credit spread option?
Options traders employ various strategies to help them maximize their potential for return. One of those strategies is called a credit spread.
Investors who take part in credit spreads buy and sell options of a particular asset at the same time. These transactions have some key features:
- They are in the same class, which means that they are all puts (when the strike price is lower than the current market value) or all calls (when the strike price is higher than the current market value).
- The contracts all have the same expiration date or the set date when the strike price must be met by for the option to succeed.
- All of the strike prices must be different.
Credit spreads technically reduce the high end of potential return, but they also seriously reduce the amount of money you can lose. It's basically diversification for options trading.
How to exit a credit spread on Robinhood
Closing a credit spread on Robinhood is simple. Here's how it works:
- Go to the contract you bought or sold.
- If you bought the contract, you want to sell the same one ("selling the close").
- If you sold the contract, you want to buy the same one ("buying the close").
How to exit a credit spread on Tastyworks
On Tastyworks' mobile platform, closing your credit spread position involves a few straightforward steps:
- Open the account you want to trade in.
- Click "Portfolio" and then select the security you want to trade.
- Tap the leg or legs you want to close, then hit "Close."
- Enter your closing price.
- Review and hit "Send."
Every online broker-dealer out there has a unique interface, so the process to close a put or call credit spread will differ between each one. However, the nitty-gritty remains the same. You sell the close or buy the close to exit a credit spread. This is a more advanced options trading strategy, but don't let that deter you from learning more about stock options trading profitability.