Why Trade Spreads

Posted on March 31, 2009 - Filed Under Finance | Leave a Comment

Option spreads can give you some new ways to look at the stock market and can help you make money trading in the short term even if you are not good at option trading. 

Option spreads can give you some new ways to look at the stock market and can help you make money trading in the short term even if you are not good at option trading. 

Here are some reasons why trading option spreads can be a good idea.

1.       Spreads give you more ways to be able to profit from the stock market.  When you combine options into spreads you are combining the power of options with the power of creativity to form trades that can let you look at the market in a different way. 

Suddenly you can make money by betting on what a stock will not do, or you can stand to make money from a huge move in the stock, even if you don't know which way that move will be.

2.       Some spreads like the bull put spread and the iron condor can give you a higher probability of being right.  Placing trades that give you a high probability of making you money is always a good thing, at least in my book.  

Aside from the obvious reasons for wanting a high probability trading method , trading with the probabilities on your side makes you feel more confident as you are right more often.

3.       Spreads can be easily adjusted if you know how to do it.  This could potentially make you profitable even if the stock turns against you.   I can't think of any other investment strategy where you could be wrong and still potentially make money.

Trading spreads can definitely give you an advantage in the stock market by combining higher probability with high returns.  But you should never underestimate spread options ability to turn against you.  That is why when you trade them you still have to use proper money management rules and develop your own rules for trading them first.

For more on option spreads visit http://www.stocks-simplified.com/Option_Spreads.html

For more about stock trading visit http://www.stocks-simplified.com

About the author

When I was young I wanted to learn how to trade the stock market.  So I traveled around the country listening to professional traders talk about how they are making money in the market.  Now I understand how easy it is to make money in the stock market and started a site http://www.stocks-simplified.com  to help others learn.

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