Many what a wild market it’s been…
There’s still a lot of uncertainty at these levels.
Today, I want to show you one indicator that I believe can be helpful when it comes to trading credit spreads.
And no, it’s not a gimmick…
It’s actually backed by mathematics — I won’t get into all the complex details of that…
However, I do want to show you there is a way to think about trading credit spreads that’s helped me.
[Revealed] One Key Indicator To Use For Credit Spreads
When it comes to stocks… I like to think they have a ceiling and floor over a specified time period.
In other words, they trade within ranges.
For example, Shopify Inc. (SHOP) closed at $736 yesterday… over the past month, the stock traded in a range between $669 and $844 (its 52-week high).
When it comes to options… I think there are a lot of traders placing “sucker” bets.
Think about it like this…
What are the chances of SHOP getting to the $940 – $950 range within the next 2 weeks?
Pretty slim, probably right?
Well, I don’t actually need to guess because there are actually tools out there that allow me to weigh the probabilities.
In other words, I can gauge the chance of SHOP getting to a certain range… if I wanted to place an options trade on it.
For example, check out this chart in Interactive Brokers for SHOP calls expiring on June 19, 2020.
Source: Interactive Brokers
As you can see, there’s less of a chance of SHOP trading above $900 than there is trading above say $750.
How do I know that?
By looking at the bars and the stock prices below that.
I like to think of credit spreads and these trades in terms of probability.
Think about it like this… if on average it’s 90 degrees on July 4th over the past 20 years in New Hampshire… and my friend wants to bet me $1,000 that it will be 110 degrees (or higher) this July 4th. If it’s not, I give him $1,500.
Well, to me… that’s a suckers’ bet.
Can it be 110 degrees this year?
But is it likely?
That’s how I like to think of credit spreads.
Now, these probabilities are actually listed for specific options series, if you’re using think or swim. It would be shown under “Probability OTM”.
By weighing the probabilities, I believe I’m in a position to stack the odds in my favor.
For example, let’s say I’m able to place a risk-defined bet that SHOP won’t break above $930 before June 19, 2020…
And the probability of that happening is less than 1%.
Well, then I would be in a position to profit.
How would I place a bet like that?
You can get all the details of the way I trade credit spreads in my newest eBook Wall Street Bookie… and find out how I’m able to use this strategy to my advantage.