Don’t Fret Low Options Trading Volume — Feast On It

Use credit spreads to take advantage of low volume

   

Yesterday, the Options Clearing Council reported that total options trading volume for the month of September was down 16% compared to the same month last year, and total contract volume year-to-date was down 14%.

That might sound like bad news, but, as always when it comes to options, there was a way to play it to your advantage — with credit spreads.

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A credit spread involves writing (selling to open) an option and purchasing (buying to open) an option at a different strike price in the same underlying security. The position, or leg, of the spread trade that you sell gives you a cash credit to your trading account. The option you buy limits your risk and lowers your margin requirement for the trade.

In a credit spread trade, you collect more money on the leg you write than you spend on the leg you buy, so you are getting paid to enter the trade. For maximum profits, you want both options involved in the spread to expire out of the money. But regardless of what happens to the options, the money you receive for opening the position is yours to keep.

So despite low volume in September, my Maximum Options subscribers made 100% profits on six credit spread trades in which both options expired out of the money. The mechanics are easy — in fact, they’re so easy, I’ll give you a trade I recently recommended to my subscribers:

Making the Trade: Use a spread order to Sell to Open the SPDR Oil & Gas Exploration & Production ETF (NYSE:XOP) Oct 52 Put (XOP121020P00052000), and Buy to Open the XOP Oct 47 Put (XOP121020P00047000), for a spread credit of 30 cents or higher.

Use an auto-stop order to close this position if XOP trades below $51.50 prior to October options expiration and you do not want to buy the stock. If you do not close the position and the XOP Oct 52 Put expires in the money, you will be obligated to buy 100 shares of the stock at $52 per share for each credit spread contract you open.

Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.


Article printed from InvestorPlace Media, http://investorplace.com/2012/10/dont-fret-low-options-trading-volume-feast-on-it/.

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