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How to Build a Defined Risk Credit Spread on a Small Account

decoded from tastyliveoptionsTrainingWatch on YouTube
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ticker lesson

Breakdown

0:00lesson

Defined risk trade setup

  • Beginners start with wrong number
  • Focus on loss before profit
  • Build bullish to neutral XSP puts credit spread
  • Cover strikes, credit, break even, max profit, max loss
2:15XSP· ticker

XSP puts credit spread setup

  • XSP tracks 1/10 of SPX
  • XSP notional value $77,500
  • SPX notional value $775,000
  • XSP volume 238,000 contracts/day
4:25lesson

Defined risk trade structure

  • Put credit spread has two puts
  • Sell one put, buy another put
  • Defined risk trade
  • Bullish to neutral position
6:06XSP· ticker

XSP puts credit spread parameters

  • Max profit = credit received
  • Max loss = spread width - credit
  • Break even = short strike - credit
  • 7 to 14 days until expiration
8:02lesson

Risk management for defined risk trades

  • Account size determines trade size
  • Same trade can be reasonable or too large
  • Use different spread widths if needed
  • Avoid moving short strike closer
9:50XSP· ticker

XSP puts credit spread setup on platform

  • Search for XSP on platform
  • Find 7 to 14 days until expiration
  • Sell put credit spread
  • Look for expected move in options market
9:51lesson

Credit spread selection and risk calculation

  • Collect at least third of spread width
  • Max profit = credit received
  • Max loss = spread width - credit
  • Probability of profit = 56%
9:52XSP· ticker

XSP puts credit spread execution

  • Sell 765 put, buy 760 put
  • Collect $1.47 on order entry
  • Max profit = $1.47
  • Max loss = $353
9:53lesson

Position management for defined risk trades

  • Profit target = 50% of credit
  • Buy back near 50 cents
  • Respect market level behind trade
  • Reassess if level fails
9:54XSP· ticker

XSP puts credit spread historical context

  • Cboe Put Write Index as reference
  • 7.1% annualized return
  • 10.8% volatility
  • 32.7% max drawdown
9:55lesson

Defined risk trade conclusion

  • Small account needs visible downside
  • XSP provides S&P 500 concept at 1/10 size
  • Defined risk trade defines maximum loss
  • Market level gives trade reason

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