Over the last few months I have had the privilege of working with hundreds of new options traders. One question that has come up on a regular basis is, why do we use so many vertical spreads in our trading?

It’s a fair question as the vertical spreads (specifically the credit spreads) have been a core strategy that we love to use.

How The Vertical Spread Changed My Trading Career

I started trading back in 2002 and for the first 5 years or so my results were all over the place.

I would have some winning stretches and then give it all back and more. In the end, I was seeing my account size shrink.

Fortunately, I had the chance to attend a training event in Chicago on the floor of the CBOE (Chicago Board Options Exchange). The traders that I got to interact with showed me how I was making some common mistakes that hold retail traders back.

Specifically, I Was Using The Wrong Strategies With My Trading.

Up until that point, I was focused exclusively on buying long calls and long puts to benefit from stocks making directional moves in our favor. The trouble was I wasn’t very good at picking market direction with any kind of consistency.

Chicago Changed My Trading Career

The training from the Chicago event changed my trading career forever. I started to learn there were much better options strategies to use that would put better odds in my favor.

The Vertical Spreads changed how I viewed the markets. I was able to use the spreads as a way to better control my risk, provide a higher probability of success, and give myself 5 ways of making money on the trades instead of only have 1 way of making money when buying long calls and puts only.

I have spent the last number of years trying to show other retail traders how important this one strategy can be. I personally believe every trader should have the spreads as at least part of their trading.

You can certainly use the long calls and puts at times as well. You just need to add the spreads to the mix as soon as possible if you really want to see the consistent results over time.

Below you will find a screenshot showing the strategies that are part of our toolbox on a regular basis. I break them down based on how aggressive each strategy is. The goal is not to convince you to use only one of these strategies.

The power kicks in when you use all of them.

You will be better equipped to react to many different market conditions and better control your risk along the way.

We love to use the credit spreads specifically because they take the pressure off needing everything to go perfectly on the trade in order to make money. When you sell a credit spread to open a trade we put time decay in our favor.

Every day that passes we are able to make money from the time decay adding up. This allows us to make money multiple different ways instead of relying on the market making a big move in our favor.

So many newer traders shy away from using the spreads due to thinking they are too advanced or too risky. In reality, they are very easy trades to use and also much safer than buying outright calls and puts. In most cases they will allow you to put on a position with a 40-60% cost savings when compared to buying options. This opens the door to use a wider range of stocks and ETF’s with a smaller account size.

If you aren’t already using the spreads, I highly recommend adding them to your toolbox as quickly as possible.

Weekly Options Recap Video – Vertical Spread Training

In this week’s Weekly Options Recap Video I take in more detail about why we love to use the vertical spreads in our trading. I cover how the trades work, how we structure them, how we make money from them, and use a few trade examples from last week to show you why they are such a game changer.

Take a look at the video below and feel free to contact me with any questions you might have. Mike@netpicks.com. Keep in mind we do have a shortened trading week next week due to markets being closed on Good Friday.