If you like slow moving commodity trades that make small profits, then option credit spreads might be of interest to you.

Option credit spreads involve selling an option that is nearer to the money and buying an option that is further out of the money. The simultaneous opening of both positions creates what is called an option spread. Actually, you don’t have to open them at the same time, but it is recommended.


The option that is nearer the money is sold, which means you collect the option premium. The other option is bought, which is at a lower price, since the strike price is further out of the money. The objective of the trade is that both options will expire worthless.

If both options expire worthless, you will make money on the option you sold and lose money on the option you bought. The good part is that you’ll make more money on the profitable option than you will lose on the unprofitable option.

Here is an example of a credit spread:

December silver futures are trading at $31.
Sell a December $35 call at 43 cents and collect $2,150.
At the same time, buy a $40 call at 12 cents, which costs $600.
You would collect $1,550 initially on the trade.

The options would expire worthless at expiration if the price of silver is not greater than $35. That would be a profit of $1,550 minus commissions. That sounds great, but there is still risk involved in the trade. The price of silver could shoot above $40 at expiration and you would suffer a loss.

The maximum loss is the difference between the strike prices. In this case it would be $25,000 - $1,550 = $23,450.

That is a huge potential loss compared to the amount of money that you could potentially profit. This is the very reason that most small traders stay away from these trades. Selling out of the money options is usually a high probability trade, but there always looms the possibility that a market will make a huge run and you get burned.

Credit spreads allow you the opportunity to use a wide variety of strike prices and timeframe to adjust a trade to met your risk tolerances. You can make the spreads much tighter, where you collect less premium and have less risk. You can also use options that are far out of the money and have little chance of expiring with any value.

You also have to consider that you will be charged futures margin on option credit spreads. You do collect net option premium, but the exchanges will charge you margin on top of the premium you collect. The more risk you have on the trade, the more the margin amount.

One common question many traders have about option spreads is why would you want to waste money buying a far out of the money option. If you are selling an option closer to the money and expecting it to expire worthless, it seems kind of senseless to buy an even further out of the money option.

That is a very good point and it almost seems counterintuitive to do this. However, the option you buy is solely for insurance purposes. It might seem like a waste of money most of the time, but there will be times when you are extremely grateful you had the protection. If you were to just sell the single option, your risk would be virtually unlimited.

Some people make a great living from selling straight options, but you have to be disciplined in cutting your losses and not allocating too much of your capital to anyone trade.

Overall, option credit spreads are one of the best ways to trade options. They are not as exciting as futures contracts or many other option strategies. However, if you are looking for the slow and steady course, this is one of the best ways to get you there.