For this episode of Market Measure, Tom and Tony discuss how to defend difficult credit spreads.
Vertical spreads consist of one long option and one short option on either the Call or Put side. There are 4 types of Vertical Spreads, separated into two categories depending on the Implied Volatility environment: credit spread and debit spread. Credit spreads are usually positioned with a short option just Out-the-Money (OTM) and a long option further OTM. We often find that it is difficult to defend such a strategy.
When we add the short put spread we increase our win rate and P/L. What were once potential losers are now winners, able to turn around and come back into profits. By forming a defensive Iron Fly we are able to decrease total aver risk and increase our average max profit!
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