The Credit Spread Strategy

This is a more advanced strategy and is really only for sophisticated investors. The bullish version involves selling a Put Option, as in the Selling Insurance example, but also buying insurance as protection.

The sold leg of this trade is typically the first or second out of the money option and the bought leg typically a few percent further out of the money.

The spread is the difference between the Strike prices of the short leg and the long leg. (Short means Sold and Long means Bought). The advantage of this strategy is that you can insure shares with the need of having the full price of the shares in your trading account as collateral.

The bullish version of this strategy, that uses Put Options, is used when the stock price is expected to rise, go sideways or even fall slightly. However if the stock price falls below your breakeven point, then other protection strategies need to be employed to guard against losses.

This strategy is pre-programmed in Paper-Trader