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Maximize Profits with Low-Cost Options Plays During Market Chaos
Weekly Edition: March 5th, 2025
News Snapshot
S&P 500 Waves Goodbye to Post-Election Gains
VIX Hits 26: Volatility has Entered the Chat
The Era of Tariffs is Gearing Up
The Market is Now Betting on 3 Rate Cuts With a 50/50 Shot in May
March Layoffs: U.S. Companies Handing Out Pink Slips Like They're on Sale
TL;DR
Wall Street is having a rough week, as the S&P 500 just wiped out all its post-election gains—because why should we have nice things? The market's fear gauge, the VIX, spiked to 26, which is finance-speak for "people are a little worried." The chaos was fueled by the U.S. slapping new tariffs on Canada, Mexico, and China, igniting fresh trade war concerns. Investors, grasping for any silver lining, are now banking on three rate cuts this year, with a 50/50 shot that the Fed starts slashing in May.
Meanwhile, the job market remains uncertain, with nearly 100 U.S. companies announcing layoffs in March, adding to concerns about economic stability and workforce security. Big-name retailers like Joann Fabrics and Walgreens are among the casualties, proving that even craft supplies and prescription meds aren’t recession-proof. With fears escalating, the Dow plunged 650 points, reflecting investor anxiety over trade tensions, layoffs, and shifting monetary policy expectations.
“Good-To-Knows”
CBOE Volatility Index (VIX) -The VIX, aka the ‘fear’ index, is a real-time market index that measures the expected volatility of the S&P 500 over the next 30 days. It’s derived from SPX index option prices, making it a forward-looking measure of market sentiment.
Since volatility reflects how quickly prices change, the VIX is often called the market's "fear gauge"—basically, when it spikes, investors start sweating. The index was created by the CBOE Options Exchange and is maintained by CBOE Global Markets, serving as a key indicator of market risk and investor sentiment. Think of it as the stock market’s mood ring—only instead of changing colors, it makes traders panic or relax.
The VIX matters because it helps investors assess market conditions and make informed decisions. Traders use it to gauge overall market risk, hedge portfolios, or speculate on volatility through futures, options, and ETFs. The VIX generally moves in the opposite direction of stock prices—rising when markets drop and falling when they recover. Unlike historical volatility, which looks backward, the VIX reflects implied volatility, meaning it predicts future market swings based on options prices. In short, it’s Wall Street’s version of a weather forecast—except it’s never sunny for too long.
Relevant Quote(s) I Like
“An investment in knowledge pays the best interest.”
“The stock market is filled with individuals who know the price of everything, but the value of nothing."
Thought Throttle
Have you ever wanted to enter into an options trade, but the cost of the trade was far too high? After all, one option contract is worth 100 shares of the underlying. By understanding options, you can find a trade that aligns with your market outlook and risk tolerance. One of the best ways options sellers can lower their positions risk, is by entering into a credit spread (aka vertical spread, bull put spread, bear call spread, etc.)
A credit spread is an options strategy that involves selling one option and buying another option of the same type (call or put) with a different strike price, both within the same expiration. This creates a net credit to the trader’s account, as the premium received from the short option is higher than the premium paid for the long option. The strategy limits both potential profit and loss, making it a risk-defined way to generate income from options trading.
Credit spreads help mitigate the risks of options by limiting both potential losses and margin requirements. By simultaneously selling and buying options at different strike prices within the same expiration, traders cap their maximum risk while still collecting premium. This strategy reduces exposure compared to selling naked options, as the long option acts as a hedge. Additionally, credit spreads require less capital, making them a more accessible way to generate income with defined risk.
Vertical credit spreads are highly flexible, allowing you to customize them based on your desired capital allocation, risk tolerance, and expected price movement. You can adjust the spread width, strike prices, and expiration dates to balance risk and reward, making them a versatile strategy for different market conditions.
How Do They Compare To Single-Leg Strategies?
Single-Leg Selling (Cash-Secured Puts & Covered Calls | Credit Spreads (Bull Put Spreads, Bear Call Spreads) | |
|---|---|---|
Max Profit | Premiums Received from selling the option | Net premium received from selling the spread (difference between sold and bought option premiums) |
Max Loss | CSP: Stock assigned at strike minus premium received; CC: Stock drops significantly | Limited to the difference between strike prices minus net premium received |
Capital Requirement | Higher (CSP requires full cash for potential assignment, CC requires owning 100 shares) | Lower (margin needed to cover potential spread loss, not full stock price) |
Risk-Reward Ratio | Higher risk, lower reward per trade | More defined risk, but also capped reward; usually higher return |
Downside Protection | No built-in protection; risk of major losses in CSP and stock declines in CC | Limited risk due to the long option leg capping potential losses |
Margin Requirement | Higher for CSP (full collateral) and CC (stock ownership) | Lower margin requirement since risk is predefined |
Assignment Risk | Higher; can be assigned if option is ITM at expiration | Lower; short option may be assigned, but long option offsets losses |
Strategic Benefit | Can generate income or allow purchase of stock at a discount (win-win scenario) | N/A (no similar strategic benefit for credit spreads) |
A bull put spread and a bear call spread are two common credit spread strategies used to generate income with limited risk. In both strategies, the maximum gains are achieved when the options expire OTM, and the maximum losses are achieved when the options expire ITM. But, they each have their own directional bias (This concept may seem complex, but the example below clarifies it).
A bull put spread involves selling a higher strike put and buying a lower strike put, profiting if the stock stays above the short strike, which limits both potential profit and loss. Bull Put Spreads are ideal for when an investor has anything but a ‘very bearish’ outlook. The stock can move up, stay the same, or even dip slightly, as long as it remains above the strike price of the short put.
The break-even is the short put’s strike price - the net credit. If the underlying is at that price or higher at expiration, you will break even or gain. The maximum gain is the credit received and is achieved when both options expire OTM. The max loss is the gap of the strike’s - the net premium received, and is achieved when both of the options expire ITM.
A bear call spread involves selling a lower strike call and buying a higher strike call, profiting if the stock stays below the short strike, which also limits both potential profit and loss. Bear Call Spreads are perfect for when an investor is anything but ‘very bullish.’ The stock can move down, not move, or slightly move upward, so long as it stays below the strike price of the short call.
The break-even is the sold call’s strike price + the net credit. If the underlying is at that price or below at expiration, you will break even or gain. If the underlying is at that price or higher at expiration, you will break even or gain. The maximum gain is the credit received and is achieved when both options expire OTM. The max loss is the gap of the strike’s - the net premium received, and is achieved when both of the options expire ITM.
Let’s review a case study to detail the potential of these spreads.
Case Study
On December 30th, 2024, Apple (AAPL) sat at $252.20. The investor is worried that AAPL is not going to continue its bull run. He is not sure if it will decline or remain flat, but he believes it will not keep increasing. The investor may be concerned that AAPL is at its resistance level, or perhaps he’s concerned about the new year, or the new president, or perhaps he even distrusts how the stock aligns with lunar cycles—stranger theories exist. Either way—he is not bullish on AAPL.
The investor decides that he would like to collect a credit on entering the trade and he does not want to commit too much capital to the trade. The investor enters into a bear call spread, in which he sells the 17 Jan 2025 $257.5 Strike call and buys the 17 Jan 2025 $262.5 Strike call (Short call has a delta of ~30). In doing this, he receives a net credit of $121.50, which is the $213.50 premium received from the $257.5 short call minus the $92 premium paid for the $262.5 long call.
By Expiration on January 17th, 2025, both of the call options expired OTM, as AAPL closed at $228.26 per share. The stock has decreased, and the investor was not wrong. Though he did not know the direction the underlying was going to go, he knew where it wasn’t going to go. He was able to keep the $121.50 in premium.
This yields a return of 32.10%. This is calculated as the Credit received ($121.50) divided by the maximum loss of $378.50 [(($262.5 - $257.5) * 100) - $121.50].
Now, on January 21st, 2025, the investor decides that AAPL has fallen enough. He is not sure what it is going to do, but he believes that it is finished declining, as it now sits at $222.64 per share.
The investor, again, decides that he would like to collect a credit on entering the trade and he does not want to commit too much capital to the trade. The investor enters into a bull put spread, in which he sells the 21 Feb 2025 $215 strike Put (Delta of ~30) and buys the $210 strike Put. In doing this, the investor receives a net credit of $150.00, which is the $405.00 premium received from the $215 short put minus the $255 premium paid for the $210 long put.
By Expiration on February 21st, 2025, both of the put options expired OTM, as AAPL closed at $245.83 per share. The stock has increased and, again, the investor was not wrong. Though he did not know the direction, he knew where it wasn’t going to go. He was able to keep the $150 in premium.
This yields a return of 42.857%. This is calculated as the Credit received ($150) divided by the maximum loss of $350 [(($215 - $210) * 100) - $150].
In Conclusion
The big advantage of credit spreads is their capital efficiency. Since the maximum loss is limited to the width of the strikes minus the premium received, traders can take positions without tying up large amounts of cash or equity. Compare this to cash-secured puts (CSPs), which require enough capital to purchase 100 shares at the strike price, and covered calls (CCs) require ownership of 100 shares, which can be a significant barrier for smaller accounts. Credit spreads do offer a certain level of accessibility.
However, credit spreads do have drawbacks. Liquidity and bid-ask spreads can be an issue, as trading two options in a spread means dealing with wider pricing inefficiencies compared to a single-leg strategy. This can impact profitability, especially in less liquid markets. Additionally, commissions can add up since there are multiple legs of the trade, while CCs and CSPs only require a single contract, reducing trading costs over time.
Another key factor to consider is assignment risk. With credit spreads, the short leg of the trade can be assigned early if it moves deep in the money, particularly if the option is close to expiration. While the long option provides some protection, traders must be prepared to manage this risk, either by rolling the position or closing it before expiration. CSPs and CCs also face assignment risk, but because they involve single-leg positions, they are generally easier to manage.
In terms of market conditions, credit spreads work best when an investor has a directional bias but is not entirely confident in the move’s magnitude. Their flexibility makes them useful when the goal is to capitalize on where the stock isn’t going, rather than needing to predict an exact direction. By contrast, CCs and CSPs are more suited for investors who are willing to take ownership of shares or already hold them and want to generate passive income.
Ultimately, credit spreads can be a powerful tool for generating income and managing risk, but they require careful execution. Investors should weigh factors like liquidity, commissions, assignment risk, and market conditions before choosing between credit spreads, covered calls, or cash-secured puts. Each strategy has its place, and the right choice depends on an investor’s capital, risk tolerance, and overall trading objectives.
Throttle Q&A
How Does Theta Affect Credit Spreads?
Theta measures an option’s sensitivity to time decay—a higher Theta means the option’s price decreases faster as expiration approaches.
When options are ITM: Theta works against you, as time decay moves the spread toward its maximum loss. Since ITM options have intrinsic value, they don’t lose value as quickly, keeping the spread at a higher risk.
When options are OTM: Theta works in your favor, as time decay pushes the options closer to expiring worthless, leading to maximum gain. Since OTM options have no intrinsic value, they decay faster, benefiting credit spread sellers.
In short, credit spread sellers want their options to stay OTM, allowing time decay to erode their value and move the trade toward full profit.
How Does Vega Affect Credit Spreads?
Vega measures an option’s sensitivity to changes in implied volatility (IV)—a higher Vega means the option's price is more affected by IV fluctuations.
When IV increases: Credit spreads lose value because both the short and long options increase in price, but the long option (higher strike) typically gains more value, hurting your position.
When IV decreases: Credit spreads benefit, as both options lose value, but the short option (lower strike) loses more, helping the spread move toward maximum profit.
In short, credit spread sellers prefer decreasing volatility, as rising IV makes it harder to profit.
What about Taxes?
Credit spreads are subject to capital gains taxes, with the specific treatment depending on the type of options traded and how long the position is held.
If the spread involves equity options (stocks and ETFs), profits are taxed as short-term capital gains if held for one year or less, meaning they are taxed at ordinary income rates. If held for more than a year, they qualify for long-term capital gains rates, though most credit spreads are short-term trades.
If the spread involves index options (SPX, RUT, NDX), it may fall under Section 1256 of the tax code, where gains and losses receive 60/40 tax treatment—60% taxed as long-term capital gains and 40% as short-term, regardless of holding period.
In short, credit spread sellers trading index options can benefit from more favorable tax treatment, while stock and ETF option traders face ordinary income rates on short-term gains. Tax laws can be complex and ever-changing, so consult a tax Advisor for personalized guidance.
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