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Video Playlist
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1
5 Tips for Successful Stock Trading | All American Group
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Alfred Explained | All American Group
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Trading SPX Options | All American Group
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Risk Management with SPX Trading Strategies | All American Group
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How To Trade Alfred
Meet Alfred, an experienced options algorithm which utilizes both put and call vertical spreads to capitalize on range estimates of the S&P 500 Index (SPX). Savvy traders utilize these strategies to manage risk and potentially profit in financial markets. In this tutorial, we’ll explore what selling a put vertical spread and a call vertical spread entail, how they work, and the ways they can either succeed or fail.
Alfred attempts to trade every trading day, however, depending on market conditions, Alfred may decide a trade is not worth the risk and sit out that day. It’s better to be cautious and live to trade another day! On days when you decide to enter a trade, it is strongly suggested to have the ability to monitor the trade throughout the day. Markets move fast these days, and you don’t want to be in a situation where your position moves against you and you have to exit at a big loss. Even with frequent monitoring, there will be days when Alfred exits without a profit. Please trade cautiously and at your own risk.
Please note that the information provided is for educational purposes only. Options trading involves inherent risks, and all trading decisions should be made with careful consideration of your financial situation and risk tolerance. Trade at your own risk, and it is strongly recommended to consult with a qualified financial advisor or professional before engaging in any options trading activities.
Selling a Put Vertical Spread
Let’s start with selling a put vertical spread. This strategy is designed for traders who believe that a particular stock or asset will not decrease significantly in price. Here’s how it works.
Select Strike Prices
You begin by selecting two put options with different strike prices. The lower strike is the "long put," and the higher strike is the "short put."
Sell the Short Put
You sell the short put option, obligating you to buy the stock at the strike price if the stock's price falls below that level by expiration.
Buy the Long Put
Simultaneously, you buy the long put option at the lower strike price. This limits your potential losses as it gives you the right to sell the stock at this strike price if the stock price declines significantly.
Net Credit
You receive a credit upfront when selling the vertical put spread, which is the maximum profit you can achieve with this strategy.
Success of Selling a Put Vertical Spread
So, how can selling a put vertical spread succeed?
If the stock price remains above the short put strike by expiration, both options expire worthless, and you keep the premium received when selling the short put. This is your maximum profit.
Selling a Call Vertical Spread
Now, let’s explore selling a call vertical spread, which is used when you believe a stock will not rise significantly in price.
Select Strike Prices
Choose two call options with different strike prices. The lower strike is the "short call," and the higher strike is the "long call."
Sell the Short Call
You sell the short call option, obligating you to sell the stock at the strike price if the stock's price rises above that level by expiration.
Buy the Long Call
Simultaneously, you buy the long call option at the higher strike price, limiting your potential losses as it gives you the right to buy the stock at this strike price if the stock price rises significantly.
Net Credit
You receive a credit upfront when selling the short call, which is your maximum profit potential.
Success of Selling a Call Vertical Spread
How can selling a call vertical spread succeed?
If the stock price remains below the short call strike by expiration, both options expire worthless, and you keep the premium received when selling the short call. This is your maximum profit.
Failure of Selling a Put or Call Vertical Spread
And what about the risks?
If the stock price surges significantly below the short put or above the short call, you could face losses, limited by the long put or call option. Transaction costs and bid-ask spread can reduce your profits.
Alfred's Strategy
Now, let’s dive into how Alfred utilizes these spreads. Alfred employs both put and call vertical spreads to capitalize on its range estimate of the S&P 500 Index (SPX).
Alfred believes that the SPX will close within a specific range. To profit from this, Alfred might sell put vertical spreads with the short put strike at the lower end of his estimated range and sell call vertical spreads with the short call strike at the upper end of the range.
Depending on market conditions and volatility, some days Alfred may enter both a put and call vertical spread. Other days it may decide it is best to only trade a put or a call, and sometimes it will determine that there is too much risk and no viable position at all that day. Remember, it is never a good idea to chase a bad trade. It is best to sit on the sidelines and live to trade another day.
If SPX stays within the estimated range, both spreads can expire worthless, allowing Alfred to capture the premiums from selling the options.
CONCLUSION
In conclusion, selling put and call vertical spreads are strategies used by options traders to generate income and manage risk. These strategies can succeed if the underlying asset behaves as anticipated, but they come with risks, including potential losses and erosion of profits.
Before implementing these strategies, it’s crucial to thoroughly understand them, consider your risk tolerance, and, when possible, seek advice from a financial professional. Options trading can be complex and is not suitable for all investors. Like Alfred, traders use these strategies strategically to navigate the dynamic world of options.
