Trading Vertical Credit Spreads with Seasonal Charts

The biggest secret of our Factor Seasonal charts is that they can be used for trading options, and especially vertical spreads. You have a directional bias for the market, so you can use options to take advantage of that. By using options, you can even make money with a small $3,000 or $5,000 account.

Seasoned options traders will tell you that when you have the momentum, timing and price target right ... and volatility as well ... you can make a lot of money by buying puts and calls. They'll also tell you that 95% of people who trade options lose money because you can rarely get all these factors right, and usually succumb to emotions which cause them to over-trade. I know, I've been there.

Well, we're not that greedy anymore. We just like steady profits over here. We like steady profits and it turns out that you can make 8-10% a month selling options if you do it correctly. Our options trading course (which we didn't create but which we picked up the rights for because it's so valuable) teaches you how.

The point of the course is TO SELL OPTIONS, but to do so in a risk structured way that you can't loose too much money, and to BALANCE YOUR POSITION WHEN THE TRADE GOES AGAINST YOU.

We have something even simpler than our options course. Vertical credit spreads, namely Bull Put Spreads and Bear Call Spreads.

What are Vertical Credit Spreads?

The vertical credit spread offers traders a limited-risk options strategy that essentially profits from the decay of time value. These spreads don't require any movement of the underlying stock to produce a profit, but in our case, we want to increase the odds of their profitability by using the seasonal charts to know what type of spread to create and when to get in.

To create a vertical spread, you simultaneously buy and sell options having two different strikes to create a spread position. In our case, we want to collect money doing this, so the leg that is sold is always the one closer to the money (which is more expensive) and the option leg that is bought is a strike further out (which is less expensive). That difference in price between the strikes, minus the premium you took in for the leg you sold, locks in your risk for the trade.

Whenever you expect a stock to go up, normally you might buy calls. A more conservative strategy might be to sell puts that are far away from the current price in order to collect the premium knowing that most options expire worthless, and thus you're mixing your seasonal directional bias in together with the fact that options usually expire worthless. In this case you want to initiate a "Bull Put Spread." You're bullish and initiate a put spread, hence the name Bull Put Spread.

To execute the Bull Put Spread strategy you buy one put option while simultaneously selling another put option with a higher strike price. The one you sell is usually an upper floor to how far down you think the stock might fall even though you expect it to go up. If the price of the underlying stock stays above the higher strike price, which is closer to the market price upon the initiation of the spread, it causes the short option to expire worthless and you keep the premium. The maximum possible profit for this strategy is equal to the difference between the amount you receive for the short put and the amount used to pay for the long put. The maximum that can incur is equal to the difference between the strike prices of the two options and the net credit received.

When you expect the market to go down, you want to sell calls to collect the premium, and so you initiate a "Bear Call Spread." It works similarly to the Bull Put Spread. However, in this case you sell a call close to the underlying price and buy a put further away to limit your risk in case the stock does go up.

With both bull put spreads and bear call spreads our potential losses are always limited to the size of the spread (the distance between the strikes) minus the initial net credit received. That's why this is a limited risk position. Speaking from a purely mathematical perspective, without any regards to the stock, the further away your closest leg of the position, the higher the chances it will expire worthless and thus you'll collect your premium. So people doing this, wanting to safely collect premium, usually have their closest leg one or two strikes away from the money.

Since the option you sell in these spreads is more expensive than the option you buy (since it's always further away), a net credit always results when you initiate these positions. So you are paying money upon purchasing far side of the spread and there's a simultaneous receipt of option premium when selling the closer side (that is, the short side). You always buy and sell the same number of options on each side of the spread, and for the same expiration date.

The key advantage to credit spreads is that in order to win they don't require strong directional movement of the underlying. This is because the trade profits from time-value decay. Vertical credit spreads can thus profit if the underlying remains in a trading range (stationary), but we're going to go over a strategy using the seasonal market timing charts to select (1) whether to use a bull or bear spread and (2) when. Usually traders like to write options with about a month or less expiration left, since that's when the time premium decay is quickest, so we're going to use that general rule.

This isn't a site about options so you'll have to look up all these things elsewhere. This article just explains how to use the options together with seasonal timing charts to lower your risks even further for safely collecting premium on options trades. There are no guarantees, but this strategy is designed to increase your odds of make money.

Using Apple Computer Seasonal Charts with Vertical Credit Spreads as a Market Timing Example

Now let's create the following rule. We want to sell options and collect the premiums using vertical credit spreads so that we limit our risks.

If our seasonal forecast goes up, we would normally want to sell puts several strikes below the price, and if the forecast heads down, we want to sell calls several strikes above the market. However, now we want to limit our risks and create vertical credit spreads to collect premiums: bull put spreads and bear call spreads.

We don't want to sell naked puts or calls or our risks are astronomical. A BP oil spill could kill us if we sold puts expecting the BP stock price to go up, and if we sold calls on a stock that is having merger talks then any buyout could kill us as well.

When we sell a $50 call, we want to buy the next call strike, say $55 or whatever it is, to lock in our risk. The difference (minus the premium we collect) is the maximum amount we can lose. The premium we pocket if all goes well will be the price of the $50 call minus the cost of the higher priced call, and it naturally should be less than the risk we're assuming on the trade if it doesn't turn out.

Why do this? Because most options expire worthless. Furthermore, we're going to help put the odds in our favor. We're only going to sell options near expiration so that the time decay is quick, and we're only going to sell them in line with the factor seasonal price direction, AND we're going to try to do it on the flex points indicated by our seasonal charts.

Let's step through the Apple Charts this year to see when we would do it on a real time basis ...

Here's the actual chart I would use to predict the price trajectory of Apple in January:

This means we'd be looking to sell calls on January 13 or thereabouts. We want to execute a Bear Call Spread.

It turned out to be an accurate forecast as the market headed lower. The price went a little against you but you're well below any strike price you sold, and the time decay worked in your favor, so you collected your premium.

The next projection chart suggests the stock will go up, so to get out of those positions at a profit and sell puts. Institute a Bull Put Spread.

Okay, that was an excellent trade as the market rallied greatly, so your spread made money.

What's next?

For this strategy, the charts suggest selling puts again (Bull Put Spread) because both the orange projection line and ordinary green seasonal are heading up, but to minimize risks you would wait until March 8 in case the market dropped. Why March 8? because the greenand orange lines show a potential low on that date. You use the spike tops and bottoms of the factor seasonal charts to execute your strategy.

Great! As you can see by the yellow price action line, your strategy of the Bull Put Spread worked again.

Now the strategy suggests selling calls on May 5 (or possibly May 13) because the projection is down, so you'd use a Bear Call Spread, but with the AAPL shares going up in price, would you dare go against the trend to do it?

You'd need guts so quick check the Factor Seasonals for Apple during bull/bear markets and recessions/expansions ...

All these charts suggest an imminent market decline, so selling puts May 5 and/or May 13 is the trader's strategy. You'll have to decide based on your own risk tolerance whether you'd do it. Typically I would use a very quick price indicator on the 4-hour price chart around May 5 in order to decide whether or not to get in.

For the 13th, I'd know whether to get in because of the price action that has already occurred. It's nice to see all the Factor Seasonals pointing down in conjunction with our orange projection line, which is currently running at a 95% accuracy correlation,so I'm game to do it.

So what happened to our strategy of a Bear Call Spread of selling a several strikes (one or two) above the market but limiting the risk by buying another call one strike even further out?

The May 5 sale would have made money and the 13th too.

On May 5 the closing price was $255.99 and the next day the stock had a big downside move.

The mid-month high was May 13 -- incredibly one day off than the high predicted because sometimes our projections are that good. The May 14 close was $253.82.

You also made money on this trade.

Okay, so what about June? What are we going to do?

One projection line goes up and another down, so stay out. PASS. Take a vacation. Rest. Go to some other trade where things line up and you have more confidence. The game is about not losing money, not excitement. Minimize your risks, so just don't trade it this month. There's nothing in your favor.

As you can see from this July chart, staying out was a smart move.

As for August, we can't form any prediction line with even so much as 30% accuracy for the most recent predictions. Therefore the market is unpredictable right now and we don't show any orange prediction line. We made our money, so stay out and turn to another stock.

That's how it's done. How many correct trades did you make withthese chafrts ... and remmeber that you can switchstocks to trade the ones where the trades look more promising instead of forcing yourself to trade Apple all year.

Our rules:

1. Find a stock that is trading somewhat predictably

2. If the charts align (ornage and green lines havesame direction) and prediction is good (>70%), create a Bull put spread or bear call spread -- vertical credit spreads -- to collect premium. Usually 1-2 strikes above/below the market with a 1 month or less expiration to go so that the time decay is extreme.

3. Watch your positions. Close them out when the forecasts change, or you can use an indicator telling you time to take profits, or however you wish to play it. We just offer the charts. The strategies you can employ are endless. Put your own spin on it. That's why we never insist you trade our specific way. We just show several ways you can use them.

4. Wash, rinse, repeat. Do it over and over again with different stocks.

You are trying to make more than what CDs pay every year, and with this strategy you can often make double digits in a month's time. When you lose money you already know exactly how much it will be, so by knowing your risks you'll never bet your whole portfolio but just a fraction.

So that's just one way to trade options with our factor seasonal charts.

You can also simply put puts or calls when the stock seasonals are headed up/down. Or you can execute a covered call strategy. Even better is to take our options course for the best gosh darned options trading strategies we've ever seen in our lives which covers iron condors and other strategies based on collecting premium, and these strategies can often make 8-15% per month, too. I showed this course to a 40-year broker and market veteran friend who after viewing it said to me, "My God, look at what we have been missing! How come we didn't know this?" It is not about buying puts and calls to make money but selling them in spreads to make consistent money. We should probably create our own Factor Seasonal Vertical Credit Spread newsletter to do this.

The point is, use strategies where the odds are in your favor ahead of time, and combine that with seasonal expectations to increase your chances of success. That's how to use seasonal market timing technical analysis to trade vertical credit spreads, namely bull put spreads and bear call spreads, at what we believe can be even lower risks than the professionals have. You can even get started with our Super Seasonal Cash Flow Trader package which gives youour software AND newsletters with these projected turning points.